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on Macroeconomics |
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Issue of 2015‒11‒15
114 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Stephen McKnight (El Colegio de México) |
| Abstract: | This paper examines the local determinacy implications of using consumption taxes and in- come taxes to finance a balanced budget fiscal policy for a variety of popular monetary policy rules. It is shown using a New Keynesian framework that the severity of the indeterminacy problem that arises under each tax system depends not only on the specification of the interest- rate feedback rule, but also on the magnitude of the steady state tax rate, the steady state government debt-output ratio, and the degree of price stickiness. However, significant differ- ences in the determinacy criteria across the two tax systems are found to exist. The robustness of the results are assessed by extending the baseline model to include capital accumulation and the taxation of bond interest income. From a policy perspective, our results suggest that future shifts towards indirect taxation could have non-trivial implications for the setting of monetary policy under balanced-budget rules, in particular the ability of the Taylor principle to achieve determinacy. |
| Keywords: | equilibrium determinacy; distortionary taxation; income taxes; consumption taxes; Taylor principle; balanced-budget rules. |
| JEL: | E32 E52 E62 E63 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:emx:ceedoc:2015-04&r=mac |
| By: | Thwaites, Gregory (Bank of England) |
| Abstract: | Over the past four decades, real interest rates have risen then fallen across the industrialised world. Over the same period, nominal investment rates fell, while house prices and household debt ratios rose. I explain these four trends with a fifth — the widespread fall in the relative price of investment goods. I present a simple closed-economy OLG model in which households finance retirement in part by selling claims on the corporate sector accumulated over their working lives. With lower capital goods prices, a given quantity of saving buys more capital goods, but the increase in the real capital-output ratio lowers the marginal product. This has ambiguous effects on interest rates in the long run: if capital and labour are complements, in line with most estimates in the literature, interest rates remain low even if the relative price of capital stabilises. Lower interest rates reduce the user cost of housing, raise house prices and, given that housing is bought early in life, increase household debt. Housing is another vehicle for retirement saving, so omitting housing from the model exacerbates the fall in interest rates. I extend the model to allow for bequests and a heterogeneous bequest motive, and show that wealth inequality rises but consumption inequality falls when capital goods prices fall. Adding a third factor of production can reconcile the recent fall in the investment rate with the fall in the labour share. I test the model on cross-country data and find support for its assumptions and predictions. The analysis in this paper shows recent debates on macroeconomic imbalances and household and government indebtedness in a new light. In particular, low real interest rates may be the new normal. The debt of the young provides an alternative outlet for the retirement savings of the old; preventing the accumulation of debt, for example through macroprudential policy, leads to a bigger fall in interest rates. |
| Keywords: | Real interest rates; relative price of capital; overlapping generations; secular stagnation |
| JEL: | E13 E22 E43 E60 |
| Date: | 2015–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0564&r=mac |
| By: | Pao-Lin Tien (Department of Economics, Wesleyan University); Tara M. Sinclair (The George Washington University); Edward N. Gamber (Congressional Budget Office) |
| Abstract: | There is a large literature evaluating forecasts by testing the rationality of forecasts and measuring the size of forecast errors, but we know little about the impact of forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Federal Reserve based on the assumption that the Fed follows a forward-looking Taylor rule. Given the effort the Fed puts towards producing forecasts that do not have an endogenous error component, this forecast error shock should be comparable to traditional monetary policy shocks and thus can be used to measure the impact of the Fed’s forecast errors on the U.S. economy. We follow Romer and Romer (2004) and investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the magnitude of the forecast error shock is large, the impact of our shock on the macroeconomy is quite small. The impact is somewhat larger when we take into consideration the Fed’s inability to forecast recessions. The maximum impact across all potential models suggests a decline of approximately one percent of real GDP and two percent of GDP deflator in response to a one standard deviation contractionary forecast error shock. |
| Keywords: | Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks |
| JEL: | E32 E31 E52 E58 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2015-004&r=mac |
| By: | Congressional Budget Office |
| Abstract: | Although federal deficits have shrunk markedly in recent years, growing spending for Social Security and major health care programs, along with increasing interest costs, would cause them to rise steadily over the long term. The larger deficits would cause federal debt to grow faster than the economy. By 2039, debt would exceed 100 percent of GDP and would be on an upward path, CBO projects—a trend that could not be sustained indefinitely. |
| JEL: | E20 E60 E61 E62 E66 H50 H51 H53 H55 H60 H61 H62 H63 H68 |
| Date: | 2014–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:454710&r=mac |
| By: | Congressional Budget Office |
| Abstract: | Although federal deficits have shrunk markedly in recent years, increased spending for Social Security and major health care programs, along with increasing interest costs, would cause debt to rise steadily over the long term. The larger deficits would cause federal debt to grow faster than the economy. By 2040, CBO projects debt would be more than 100 percent of GDP and continue on an upward path—a trend that cannot be sustained indefinitely. |
| JEL: | E20 E60 E61 E62 E66 H50 H51 H53 H55 H60 H61 H62 H63 H68 |
| Date: | 2015–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:502500&r=mac |
| By: | Meijers, Huub (UNU-MERIT); Muysken, Joan; Sleijpen, Olaf |
| Abstract: | In the Netherlands firms' savings, i.e. retained profits, exceed investment at a national level. The resulting net savings are mainly held abroad. Moreover, there is a striking resemblance in the development of net savings of firms' on the one hand and the surplus on the current account on the balance of payments on the other. Both have increased to almost 10% of GDP in recent years. Next to that, the housing boom household net-savings have decreased prior to 2007 following the housing boom, accompanied by an increase in government net-savings. These trends reversed thereafter due to the bursting of the housing bubble. We present a stock-flow consistent model of the firm to explain firms' excess savings, inspired by Hein (2012), and embed that in an open economy model with a banking sector which we have developed earlier. This enables us to model the preference of firms to invest in financial assets abroad and to analyse the close link between firms' excess savings and the current account surplus. As a consequence we also explain the close link between net household savings and government budget deficit. We present simulation results to illustrate the working of our model. |
| Keywords: | stock-flow consistent modelling, retained profits, current account surplus |
| JEL: | E44 E60 G32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2015040&r=mac |
| By: | Daragh Clancy (ESM) |
| Abstract: | We examine the implications of government expenditure that is complementary to private consumption, and government investment that can improve the productivity of private capital in a global DSGE model. We show that government investment can improve an economy’s external competitiveness and stimulate private investment. If governments can finance this investment by reducing consumption that is not complementary to private consumption, then this is ex-ante budget-neutral, provides a small, but persistent stimulus without a deterioration in competitiveness, and leads to lower debt in the medium run. We also examine the cross-border transmission channels of government expenditure shocks in a monetary union when government consumption is complementary to private and public investment is productive. While both assumptions enhance cross-border spillovers, a direct import content is required to generate spillovers similar to those found in the literature |
| Keywords: | Government expenditure, Competitiveness, EMU, Spillovers, Trade |
| JEL: | E22 E62 H54 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:4&r=mac |
| By: | Olivier Blanchard (Peterson Institute for International Economics); Eugenio Cerutti (International Monetary Fund); Lawrence H. Summers (Harvard University) |
| Abstract: | We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. We draw implications of our findings for monetary policy. |
| Keywords: | Recessions, Hysteresis, Phillips Curve, Monetary Policy |
| JEL: | E31 E32 E50 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp15-19&r=mac |
| By: | F. Gulcin Ozkan; D. Filiz Unsal |
| Abstract: | This paper explores how best a small open economy can defend against a foreign interest rate rise, such as the impending Fed lift-off. We find that a broad based macroprudential policy is the mosteffective tool in containing fluctuations arising from the interest rate shock, hence yielding the lowest loss in welfare. |
| Keywords: | Foreign interest rates; emerging markets; monetary pol-icy; macroprudential measures; capital controls. |
| JEL: | E5 F3 F4 G1 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:15/25&r=mac |
| By: | Verbrugge, Randal (Federal Reserve Bank of Cleveland); Higgins, Amy (Federal Reserve Bank of Cleveland) |
| Abstract: | We make five contributions. We demonstrate that extant trimmed-mean and median CPI construction procedures depart from Bureau of Labor Statistics index construction procedures, and that the departures don’t make much of a difference. We produce nonseasonally adjusted variants of the trimmed-mean CPI and median CPI, and demonstrate that these are useful real-time estimates of trend inflation; the NSA median CPI outperforms the median CPI, but both SA and NSA variants of the median and the trimmed-mean CPI easily dominate the so-called “core” CPI. We introduce superior ex post measures of trend inflation. We demonstrate that a small amount of time-series averaging reaps large rewards. Finally, we discuss using model-averaging as a new direction for simple and robust trend inflation indicators. |
| Keywords: | inflation measurement; trimmed-mean inflation estimators; seasonal adjustment; trend inflation; time averaging |
| JEL: | E31 E32 E37 |
| Date: | 2015–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1527&r=mac |
| By: | Hertrich, Markus |
| Abstract: | In the aftermath of the recent financial crisis, the central banks of small open economies such as the Czech National Bank and the Swiss National Bank (SNB) both implemented a unilateral one-sided exchange rate target zone vis-a-vis the euro currency to counteract deflationary pressures. Recently, the SNB abandoned its minimum exchange rate regime of CHF 1.20 per euro, arguing that after having analyzed the costs and benefits of this non-standard exchange rate policy measure, it was no longer sustainable. This paper proposes a model that allows central banks to estimate ex-ante the costs of implementing and maintaining a unilateral one-sided target zone and to monitor these costs during the period where it is enforced. The model also offers central banks a tool to identify the right timing for the discontinuation of a minimum exchange rate regime. An empirical application to the Swiss case shows the actual size of these costs and reveals that these costs would have been substantial without the abandonment of the minimum exchange rate regime, which accords with the official statements of the SNB. |
| Keywords: | Foreign exchange reserves, minimum exchange rate, reflected geometric Brownian motion, target zone costs, Swiss National Bank |
| JEL: | E42 E52 E58 E6 E63 F33 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67839&r=mac |
| By: | Wu, Ji (Research Institute of Economics and Management); Jeon, Bang Nam (School of Economics); Chen, Minghua (Research Institute of Economics and Management); Wang, Rui (Research Institute of Economics and Management) |
| Abstract: | This paper addresses the impact of monetary policy on banks’ risk-taking by using the bank-level panel data from more than 1000 banks in 33 emerging economies during 2000-2012. We find that, consistent with the proposition of the “bank risk-taking channel” of monetary policy transmission, banks’ riskiness increases when monetary policy is eased. Bank risk-taking amid expansionary monetary policy is more conspicuous in small and less liquid banks, and in countries with a stronger deposit insurance scheme and a fixed exchange rate regime. We also find that the monetary policy-bank risk nexus is dampened in more concentrated banking markets and when monetary policy is more transparent. |
| Keywords: | Monetary policy; Bank risk-taking; Emerging economies |
| JEL: | E44 E52 G21 |
| Date: | 2015–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2015_003&r=mac |
| By: | Heather D. Gibson; Stephen G. Hall; George S. Tavlas |
| Abstract: | We examine the impact of the ECB’s Securities Market Program (SMP) and the ECB’s two Covered Bond Purchase Programs (CBPPs) on sovereign bond spreads and covered-bond prices, respectively, for five euro-area stressed countries -- Greece, Ireland, Italy, Portugal, and Spain. Our data are monthly and cover the period from 2004M01 through 2014M07. In contrast to previous studies, we use actual, confidential, intervention data. Our results indicate that the respective asset purchase programs reduced sovereign spreads and raised covered bond prices. The quantitative effects of the programs were modest in magnitude, but nevertheless significant. We also provide a simple theoretical model that explains why official asset purchases can reduce a country’s default-risk spreads. |
| Keywords: | Monetary-policy effectiveness, ECB’s asset purchase programs, euro-area crisis. |
| JEL: | E43 E51 E52 E63 F33 F41 G01 G12 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:15/24&r=mac |
| By: | Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester and Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester) |
| Abstract: | We examine the impact of the ECB’s Securities Market Program (SMP) and the ECB’s two Covered Bond Purchase Programs (CBPPs) on sovereign bond spreads and covered-bond prices, respectively, for five euro-area stressed countries -- Greece, Ireland, Italy, Portugal, and Spain. Our data are monthly and cover the period from 2004M01 through 2014M07. In contrast to previous studies, we use actual, confidential, intervention data. Our results indicate that the respective asset purchase programs reduced sovereign spreads and raised covered bond prices. The quantitative effects of the programs were modest in magnitude, but nevertheless significant. We also provide a simple theoretical model that explains why official asset purchases can reduce a country’s default-risk spreads. |
| Keywords: | Monetary-policy effectiveness; ECB’s asset purchase programs; euro-area crisis |
| JEL: | E43 E51 E52 E63 F33 F41 G01 G12 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:199&r=mac |
| By: | Cooper, Daniel H. (Federal Reserve Bank of Boston); Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston) |
| Abstract: | Residential investment accounts for an important component of U.S. gross domestic product, and traditionally plays a strong role in business cycle expansions. U.S. residential investment has improved slowly during the recovery from the Great Recession, despite a relatively strong national rebound in house prices and record low interest rates. An important determinant of residential investment is the household formation rate, which is largely driven by young adults moving out of their parents’ homes after completing high school or college. New household formation can be offset when existing households combine, typically through marriage or by moving in with parents or other relatives for economic reasons. This paper uses National Longitudinal Survey of Youth (NLSY) data from the 1979 and the 1997 cohorts to examine how various demographic, economic, and geographic factors influence the rate of household formation among young adults, both within cohorts and over time across cohorts. |
| JEL: | E24 J11 R21 |
| Date: | 2015–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbcq:2015_004&r=mac |
| By: | Congressional Budget Office |
| Abstract: | In calendar year 2014, ARRA—which was enacted in 2009—raised real GDP by between a small fraction of a percent and 0.2 percent and increased the number of full-time-equivalent jobs by between a slight amount and 0.2 million, CBO estimates. |
| JEL: | E62 E65 |
| Date: | 2015–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:499580&r=mac |
| By: | Altavilla, Carlo; Darracq Pariès, Matthieu; Nicoletti, Giulio |
| Abstract: | We use bank-level information on lending practices from the euro area Bank Lending Survey to construct a new indicator of loans’ supply tightening controlling for both macroeconomic and bank-specific factors. Embedding this information as external instrument in a Bayesian vector autoregressive model (BVAR), we find that tighter bank loan supply to non-financial corporations leads to a protracted contraction in credit volumes and higher bank lending spreads. This fosters firms’ incentives to substitute bank loans with market finance, producing a significant increase in debt securities issuance and higher bond spreads. We also show that loans’ tightening shocks explain a large fraction of the contraction in real activity and the widening of credit spreads especially over the recession which followed the euro area sovereign debt crisis. JEL Classification: E51, E44, C32 |
| Keywords: | Bank Lending Survey, Credit Supply, External Instruments, Lending standards |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151861&r=mac |
| By: | Uddin, Md Akther |
| Abstract: | This paper discusses Islamic monetary policy which could potentially be a sustainable alternative to the conventional. Islamic banks and financial institutions have to set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. By analyzing current literature on Islamic monetary policy models it is proposed in this study that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instrument and reference rate for financial and capital market to set the cost of capital or rate of return. In order to test the two proposed models, one year data from 99 countries have been collected. The study uses the OLS regression and the result shows that real interest rate is not a viable instrument for monetary policy framework as no significant relationship has been found with key factors such as inflation and unemployment. On the other hand, GDP growth rate has a statistically significant relationship with inflation and unemployment, GDP growth rate is higher for OIC countries, however, unemployment rate is higher. |
| Keywords: | Monetary Policy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings |
| JEL: | E0 |
| Date: | 2014–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67696&r=mac |
| By: | Neagu, Florian; Tatarici, Luminita; Mihai, Irina |
| Abstract: | We describe an example of designing, implementing and calibrating two macroprudential instruments – loan-to-value (LTV) and debt service-to-income (DSTI) – based on a decade of Romanian experience with these tools. We investigate LTV and DSTI effectiveness in trimming down excessive credit growth and in preserving the quality of banks’ loan portfolios. We find strong links between DSTI levels and the debtors’ capacity to repay their debt, underpinning the usefulness of caps for this instrument. We find that an approach based to a large extent on banks’ self-regulation produces suboptimal results, exacerbating the pro-cyclicality in the system. A one‑size-fits-all approach is less effective than tailoring the DSTI and LTV measures based on debtors’ disposable income, the currency of indebtedness and the destination of the loan |
| Keywords: | financial stability, macroprudential instruments, house prices, credit growth, debt service-to-income (DSTI), loan-to-value (LTV), Romania |
| JEL: | E44 E58 G21 G28 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65988&r=mac |
| By: | Neven Vidakovic (Effectus - University Collage for Law and Finance) |
| Abstract: | The present paper looks at the impact of exchange rate regime and a household’s choice of debt. One of the characteristics of economic transition in eastern European countries has been an increase in overall debt holding. Standard economic theory assumes the relationship S=I. According to this relationship, households should use debt only to purchase durable goods; however, in some eastern European countries, there has been a large increase in consumer loans, economic behavior not recognized under the standard no-Ponzi scheme assumption of economic models. This paper aims to investigate the case when debt is used to live above a household’s standard budget constraint. Our model shows that the significant impact on the choice of the amount the debt households are willing to hold is due to the choice of the exchange rate regime made by the central bank. The model investigates a household’s behavior in two main cases: a stable exchange rate regime (exchange rate regime with FX risk) and a variable exchange rate regime (exchange rate regime without exchange rate risk). Households make different choices under alternative exchange rate regimes; this pattern of behavior is presented in the model and verified by the data. |
| Keywords: | credit, exchange rate, dynamic programming |
| JEL: | E51 C61 E58 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:eff:wpaper:0001&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Biyan Tang (Department of Economics, The University of Kansas;) |
| Abstract: | Since China’s enactment of the Reform and Opening-Up policy in 1978, China has become one of the world’s fastest growing economies, with an annual GDP growth rate exceeding 10% between 1978 and 2008. But in 2015, Chinese GDP grew at 7 %, the lowest rate in five years. Many corporations complain that the borrowing cost of capital is too high. This paper constructs Chinese Divisia monetary aggregates M1 and M2, and, for the first time, constructs the broader Chinese monetary aggregates, M3 and M4. Those broader aggregates have never before been constructed for China, either as simple-sum or Divisia. The results shed light on the current Chinese monetary situation and the increased borrowing cost of money. GDP data are published only quarterly and with a substantial lag, while many monetary and financial decisions are made at a higher frequency. GDP nowcasting can evaluate the current month’s GDP growth rate, given the available economic data up to the point at which the nowcasting is conducted. Therefore, nowcasting GDP has become an increasingly important task for central banks. This paper nowcasts Chinese monthly GDP growth rate using a dynamic factor model, incorporating as indicators the Divisia monetary aggregate indexes, Divisia M1 and M2 along with additional information from a large panel of other relevant time series data. The results show that Divisia monetary aggregates contain more indicator information than the simple sum aggregates, and thereby help the factor model produce the best available nowcasting results. In addition, our results demonstrate that China’s economy experienced a regime switch or structure break in 2012, which a Chow test confirmed the regime switch. Before and after the regime switch, the factor models performed differently. We conclude that different nowcasting models should be used during the two regimes. |
| Keywords: | China, Divisia Monetary Index, Borrowing Cost of Money, Nowcasting, Real GDP Growth Rate, Dynamic Factor Model, Regime Switch |
| JEL: | C32 C38 C43 E47 E51 O53 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201506&r=mac |
| By: | Barnett, William A.; Tang, Biyan |
| Abstract: | Since China’s enactment of the Reform and Opening-Up policy in 1978, China has become one of the world’s fastest growing economies, with an annual GDP growth rate exceeding 10% between 1978 and 2008. But in 2015, Chinese GDP grew at 7%, the lowest rate in five years. Many corporations complain that the borrowing cost of capital is too high. This paper constructs Chinese Divisia monetary aggregates M1 and M2, and, for the first time, constructs the broader Chinese monetary aggregates, M3 and M4. Those broader aggregates have never before been constructed for China, either as simple-sum or Divisia. The results shed light on the current Chinese monetary situation and the increased borrowing cost of money. GDP data are published only quarterly and with a substantial lag, while many monetary and financial decisions are made at a higher frequency. GDP nowcasting can evaluate the current month’s GDP growth rate, given the available economic data up to the point at which the nowcasting is conducted. Therefore, nowcasting GDP has become an increasingly important task for central banks. This paper nowcasts Chinese monthly GDP growth rate using a dynamic factor model, incorporating as indicators the Divisia monetary aggregate indexes, Divisia M1 and M2 along with additional information from a large panel of other relevant time series data. The results show that Divisia monetary aggregates contain more indicator information than the simple sum aggregates, and thereby help the factor model produce the best available nowcasting results. In addition, our results demonstrate that China’s economy experienced a regime switch or structure break in 2012, which a Chow test confirmed the regime switch. Before and after the regime switch, the factor models performed differently. We conclude that different nowcasting models should be used during the two regimes. |
| Keywords: | China, Divisia Monetary Index, Borrowing Cost of Money, Nowcasting, Real GDP Growth Rate, Dynamic Factor Model, Regime Switch |
| JEL: | C32 C38 C43 E47 E51 O53 |
| Date: | 2015–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67691&r=mac |
| By: | Hills, Robert (Bank of England); Hooley, John (International Monetary Fund); Korniyenko, Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England) |
| Abstract: | This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the impact of liquidity shocks on banks’ lending behaviour, using proprietary bank-level data available to central banks. Specifically, we examine the impact of changes in funding conditions on UK-resident banks’ domestic and external lending from 2006–12. Our results suggest that, following a rise in the liquidity shock measure, UK-resident banks that grew their balance sheets quicker relative to their peers pre-crisis, decreased their external lending by more relative to other banks, and increased their domestic lending. When we account for country of ownership, we find that the same pattern was true for both UK-owned and foreign-owned banks, but more pronounced for UK-owned banks’ domestic and foreign-owned banks’ external lending. These results are robust to splitting the data into real and financial sector lending, the use of more granular bilateral country loan data and controlling for the various banking system interventions made by governments in 2008–09. |
| Keywords: | Liquidity shock; global financial crisis; cross-border and domestic lending. |
| JEL: | E44 E51 E52 G18 G21 |
| Date: | 2015–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0562&r=mac |
| By: | Alain Kabundi; Eric Schaling; Modeste Some |
| Abstract: | This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged inflation and the opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents’ expectations. |
| Date: | 2014–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6107&r=mac |
| By: | Stefano Eusepi (Federal Reserve Bank of New York); Emanuel Moench (Deutsche Bundesbank); Bruce Preston (Melbourne University); Carlos Carvalho (PUC-Rio) |
| Abstract: | According to both central bankers and economic theory, anchored inflation expectations are key to successful monetary policymaking. Yet, we know very little about the drivers of inflation expectations -- especially about the long run. We explore a simple model of expectations formation and inflation determination in which the sensitivity of long-run inflation expectations to short-run inflation surprises is state-dependent. Price-setting agents act as econometricians trying to learn about average long-run inflation. They set sticky prices according to their views about future inflation, which hence feed into actual inflation. As in Marcet and Nicolini (2003), agents' estimates of long-run inflation move slowly in normal times, as they keep adding observations to the sample they consider. However, after being surprised repeatedly/largely enough, agents discard old observations and put more weight on recent developments. As a result, long-run inflation expectations become more sensitive to short-run news. We estimate the model using only short-run inflation forecasts from surveys, and find that it produces long-run forecasts that track survey measures quite closely. The estimated model has several uses: 1) It can tell a story of how inflation expectations got unhinged in the 1970s; it can also be used to construct a counterfactual history of inflation under anchored long-run expectations. 2) At any given point in time, it can be used to compute the probability of inflation or deflation scares. 3) If embedded into an environment with explicit monetary policy, it can also be used to study the role of policy in shaping the expectations formation mechanism. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1228&r=mac |
| By: | Verdugo, Gregory (Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | We study the response of real wages to the business cycle in eight major Eurozone countries before and during the Great Recession. Average real wages are found to be acyclical, but this reflects, in large part, the effect of changes in the composition of the labour force related to unemployment variations over the cycle. Using longitudinal micro data from the ECHP and SILC panels to control for composition effects, we estimate the elasticities of real wage growth to unemployment increases between −0.6 and −1 over the period 1994-2011. Composition effects have been particularly large since 2008, and they explain most of the stagnation or increase in the average wage observed in some countries from 2008 to 2011. In contrast, at a constant labour force composition in terms of education and experience, the figures indicate a significant decrease in average wages during the downturn, particularly in countries most affected by the crisis. Overall, there is no evidence of downward nominal wage rigidity during the Great recession in most countries in our sample. |
| Keywords: | wage cyclicality, wage rigidity, Great Recession, Eurozone |
| JEL: | J30 E32 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9469&r=mac |
| By: | Bilin Neyapti (Bilkent University); Derin Aksit |
| Abstract: | This paper analyzes the relationship between income distribution and the severity of economic crises, where the severity is measured by the length and the depth of the recessions. Using an extensive panel dataset on income distribution and employing an event study framework, we find significant evidence that there is a negative association between the prevailing degree of income inequality and the severity of the recessions. In the case of high income countries that have bad income distribution, however, recessions are observed to be longer than the average. This observation is likely to result from the combination of the strong status-quo bias of the financially powerful income groups and the available means to redistribute towards the poor so as to help mitigate the pressures for reforms to improve income distribution via creative destruction. The longer period of recessions observed in developed countries than in less developed countries in the aftermath of the Great Recession is in support of this argument. The findings also reveal that recessions tend to be longer during the decade of the 1990s than the rest of the period studied. The evidence regarding the corrective effect on the recessions of accommodative fiscal or monetary policy stance, measured by the size of the government and the inflation rate, is observed to be only barely significant on average. With regard to the impact of recessions on income distribution, the evidence in the paper indicates that the post-crises income distribution worsens significantly with the length but improves with the depth of the preceding recession. We also note that, in addition to the persistence effect, the lack of monetary discipline worsens income distribution in the postcrises period significantly. |
| Keywords: | Recession, Income Distribution. |
| JEL: | E25 E32 O11 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1523&r=mac |
| By: | Dimitris Papageorgiou (Bank of Greece); Evangelia Vourvachaki (Bank of Greece) |
| Abstract: | This paper studies the impact of product and labour market structural reforms and the effects of their joint implementation with alternative debt consolidation strategies. The set-up is a DSGE model calibrated for the Greek economy. The results show that structural reforms produce important long-run GDP gains that materialize earlier, the faster the reforms are implemented. When implemented jointly with fiscal consolidations, structural reforms may amplify the short-run costs of fiscal tightening. The GDP dynamics depend on the fiscal instrument used for public debt consolidation. In the long run, however, there are complementarity gains irrespective of the fiscal instrument used. |
| Keywords: | Structural reforms; Debt consolidation; Small open economy; General equilibrium model |
| JEL: | E27 E62 O4 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:197&r=mac |
| By: | Sergio Cesaratto (University of Siena) |
| Abstract: | The primary purpose of these lectures is didactic. They show the development of the ECB intervention from 2008 to 2015 taking the evolution of the consolidated balance sheet of the Eurosystem as reference point. They endorse the theory of endogenous money as theoretical landmark. |
| Keywords: | Eurosystem, Euro, European Central Bank, Balance Sheet, Endogenous Money, Quantitative Easing, Monetary Policy, TARGET 2, Long Term Refinancing Operation, Outright Monetary Transactions. |
| JEL: | E40 E50 F33 F36 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ais:wpaper:1510&r=mac |
| By: | Congressional Budget Office |
| Abstract: | CBO projects that, under current law, the federal budget deficit will fall to $468 billion in 2015 – 2.6 percent of GDP – and remain roughly stable, as a percentage of GDP, through 2018. After that, the gap between spending and revenues is projected to grow, raising the already high level of federal debt. CBO anticipates that, under current law, economic activity will expand at a solid pace in 2015 and the next few years, reducing the amount of underused resources, or “slack,” in the economy. |
| JEL: | E20 H60 H61 H68 |
| Date: | 2015–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:498920&r=mac |
| By: | Elosegui, Pedro; Grosman, Nicolas |
| Abstract: | The paper develops a Structural Model with the main macroeconomic features of the Ecuadorian economy. It models the main transmission channels of a small open and dollarized economy, highly dependent on oil production and foreign remittances. It is estimated by Bayesian methods for the period 2001-2010. The framework highlights the main risks affecting the macroeconomic performance, including the importance of international shocks. It also underscores the importance of the fiscal policies and the independent and significant role of the oil value added in the domestic economy. |
| Keywords: | New Keynesian model, Bayesian methods, Oil Value Added, Fiscal policy |
| JEL: | E02 O11 Q43 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67686&r=mac |
| By: | Olivier Blanchard (Peterson Institute for International Economics); Gustavo Adler (International Monetary Fund); Irineu de Carvalho Filho (International Monetary Fund) |
| Abstract: | Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows. |
| Keywords: | foreign exchange intervention, exchange rate, capital flows, gross capital flows |
| JEL: | E42 E58 F31 F40 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp15-18&r=mac |
| By: | Stefan Kawalec (Capital Strategy) |
| Abstract: | In 2014, the Eurozone, with its huge current account surplus, was a major source of global economic imbalances. This phenomenon could last for a long time. Monetary expansion, which leads to currency depreciation, is the only macroeconomic tool available to the European Central Bank (ECB) to boost the competitiveness of struggling southern economies vis-à-vis countries outside the Eurozone. With the current economic imbalances within the Eurozone, the elimination the Eurozone’s current account surplus through appreciation of the euro would aggravate economic conditions in struggling member countries and could be politically explosive. Some observers hope that the Eurozone’s internal imbalances can be reduced by more expansionary policies in Germany or, in the future, by wealth transfers to be enabled when the fiscal and political union materializes. Both hopes are unjustified. A huge Eurozone current account surplus is likely to persist, and this will lead to tensions with the US and other trade partners. It could especially undermine the proposed Transatlantic Trade and Investment Partnership (TTIP). This contradicts a popular view that the European Union needs a single currency to operate successfully in the world economy among big players like the US, China and India. In fact, if the Eurozone countries had (or returned to) their national currencies, linked through adjustable currency bands as proposed in Kawalec and Pytlarczyk (2013 a, 2013 b), trade and current account deficits in countries in crisis could be eliminated through balancing imbalances among present Eurozone members, without the necessity to generate a huge surplus by the Eurozone as a whole. However, a single currency forces the Eurozone to try to desperately generate trade and current account surpluses, which is likely to spark currency wars with its main economic partners. This would impede international trade and diminish the benefits that Europe could achieve from international cooperation. |
| Keywords: | Eurozone, Current Account, Euro, Economic Imbalance, National Currencies, Internal Devaluation. |
| JEL: | E66 F32 F33 F36 F35 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ais:wpaper:1509&r=mac |
| By: | Kodila-Tedika, Oasis; Asongu, Simplice |
| Abstract: | We assess the correlations between tribalism and financial development in 123 countries using data averages from 2000-2010. The tribalism index is used to measure tribalism whereas financial development is measured from perspectives of financial intermediary and stock market developments. The long-term variable is stock market capitalisation while short-run indicators include: private and domestic credits. We find that tribalism is negatively correlated with financial development and the magnitude of negativity is higher for financial intermediary development relative to stock market development. The findings are particularly relevant to African and Middle Eastern countries where the scourge is most pronounced. |
| Keywords: | Tribalism; Financial Development |
| JEL: | E62 G20 H11 H20 O43 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67855&r=mac |
| By: | Bacchetta, Philippe; Merrouche, Ouarda |
| Abstract: | Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe. |
| Keywords: | corporate debt; credit crunch; foreign banks; money market |
| JEL: | E44 G21 G30 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10927&r=mac |
| By: | K. Istrefi; B. Vonnak |
| Abstract: | Some authors argue that the delayed overshooting puzzle often found in the literature is an artifact of improper identification of monetary policy shocks, like Cholesky ordering. We investigate this claim by estimating the dynamic effect of monetary policy shocks on exchange rate using various identification schemes, where the data is generated by a small open economy DSGE model. We find that, on large sample, Cholesky type of restrictions perform comparably with model-consistent sign restrictions approach and do not produce the puzzle artificially. On short samples, however, Cholesky restrictions produce a more uncertain estimate for the shape of the exchange rate than sign restrictions. |
| Keywords: | Monetary Policy; Exchange Rate; DSGE; Vector Autoregressions; Cholesky Decomposition; Sign restrictions. |
| JEL: | E52 F41 C32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:576&r=mac |
| By: | Helen Louri (Athens University of Economics and Business and London School of Economics (EI/HO)); Petros M. Migiakis (Bank of Greece) |
| Abstract: | In the present paper we study the determinants of the margins paid by euro-area non-financial corporations (NFCs) for their bank loans on top of the rates they earn for their deposits (bank lending margins). We use panel VAR techniques, in order to test for causality relationships and produce impulse response functions for eleven euro-area countries from 2003:1 to 2014:12. The countries are separated to two groups (distressed and non-distressed), in order to examine for heterogeneities in the relationships between lending margins, the period is also separated with reference to the peak of the global financial crisis (before and after the collapse of Lehman in September 2008). We find that significant heterogeneities existed even before the global financial crisis and remained in its aftermath, although the magnitude and the direction of the effects exercised by the explanatory variables have changed. Furthermore, apart from finding that market concentration and the prudence of banks’ management increase the lending margins NFCs pay for their loans, there is evidence of substitution effects between financing obtained from banks and corporate bond markets. The provision of ample liquidity from the ECB, in the aftermath of the global financial crisis was found to be effective only for the core countries, suggesting that further policy actions are needed in order to reduce the fragmentation of bank lending and promote financial integration to the benefit of the euro-area real economy. |
| Keywords: | bank lending margins; euro area; financial fragmentation; global financial crisis; European Central Bank |
| JEL: | E44 E51 E58 F36 F42 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:198&r=mac |
| By: | Ngotran, Duong |
| Abstract: | Since 1980, the U.S. economy has witnessed simultaneously two macroeconomic themes: (i) the substantial growth of the financial sector, and (ii) the significant rise in income inequality. At the same time, there was a crucial change in the financial market where a wide range of new financial assets were introduced. This paper, by presenting a simple model of the interaction between the financial and real sectors, shows that the appearance of new financial instruments can generate both above themes. It can also explain the dominance of Wall Street against Main Street (non-financial sectors) in the top income earners category. |
| Keywords: | New assets, financial innovation, income inequality |
| JEL: | E44 |
| Date: | 2015–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67650&r=mac |
| By: | Cruz-Rodríguez, Alexis |
| Abstract: | The aim of this article is to assess whether a fiscal sustainability indicator (FSI) can be used as an early warning indicator for predicting the probability that a currency crisis occurs. Using the FSI developed by Croce and Juan-Ramón (2003) and two different definitions of currency crisis, a probit model is estimated. The results suggest that the lagged FSI has an explanatory power over currency crises in a selection of countries. |
| Keywords: | Currency crises, foreign exchange, fiscal sustainability, probit model |
| JEL: | E62 F31 F33 |
| Date: | 2015–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67741&r=mac |
| By: | Heather D. Gibson; Stephen G. Hall; George S. Tavlas |
| Abstract: | We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices. |
| Keywords: | euro-area financial crisis, sovereign-bank linkages, banks’ performance, banking stability. |
| JEL: | E3 G01 G14 G21 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:15/25&r=mac |
| By: | Congressional Budget Office |
| Abstract: | In certain reports and for some major pieces of legislation, CBO analyzes the short-term and longer-term effects on the overall economy of changes in federal fiscal (tax and spending) policies. This report, which is part of the agency’s ongoing effort to make its analyses transparent, explains the methods that CBO uses in such analyses. |
| JEL: | E62 E66 |
| Date: | 2014–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:494940&r=mac |
| By: | David Berger; Ricardo Caballero; Eduardo Engel |
| Abstract: | When microeconomic adjustment is lumpy, the VAR-estimated persistence of the corresponding aggregated variable is downward biased. The extent of this bias decreases with the level of aggregation, yet convergence is very slow and the bias is likely to be present for sectoral data in general and, in many cases, for fully aggregated data as well. Paradoxically, while idiosyncratic productivity and demand shocks smooth away microeconomic non-convexities and are often used to justify approximating aggregate dynamics with linear models, their presence exacerbates the bias. We propose procedures to correct for the bias and provide various applications. In one of them, we account for the persistence-gap behind Bils and Klenow’s (2004) rejection of the Calvo model. In another, we find that the difference in the speed with which inflation responds to sectoral and aggregate shocks (Boivin et al 2009; Mackoviak et al 2009) disappears once we correct for the missing persistence bias. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp412&r=mac |
| By: | Dudley, William (Federal Reserve Bank of New York) |
| Abstract: | Remarks at the Economic Press Briefing, Federal Reserve Bank of New York, New York City. |
| Keywords: | macroeconomy; unemployment risk; labor income; housing opportunities; housing units; housing markets; housing stock; diversity of experience; mortgage credit |
| JEL: | E66 |
| Date: | 2015–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:183&r=mac |
| By: | Njindan Iyke, Bernard |
| Abstract: | This paper explores the correlations of the short- and long-term interest rate series through time in South Africa. Two time series techniques are utilized: the Kapetanios et al. (2003) nonlinear STAR unit root test and the asymmetric cointegration with threshold adjustment test of Enders and Siklos (2001). We find the interest rate series (i.e. the SARB policy rate and the yield on long-term government bonds) to be cointegrated with fairly weak threshold adjustment. In addition, we find a distinct causal flow from the yield on long-term government bonds to the SARB policy rate with momentum equilibrium adjustment symmetry, indicating that linear error correction models may fit the yield curves in South Africa better. |
| Keywords: | Asymmetric Adjustment, Cointegration, Term Structure, Interest Rates, South Africa |
| JEL: | C58 E43 |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67681&r=mac |
| By: | Carlson, Mark A. (Bank for International Settlements, Basel, Switzerland); Wheelock, David C. (Federal Reserve Bank of St. Louis) |
| Abstract: | This paper examines the impact of the Federal Reserve’s founding on seasonal pressures and contagion risk in the interbank system. Deposit flows among classes of banks were highly seasonal before 1914; amplitude and timing varied regionally. Panics interrupted normal flows as banks throughout the country sought funds from the central money markets simultaneously. Seasonal pressures and contagion risk in the system were lower by the 1920s, when the Fed provided seasonal liquidity and reserves. Panics returned in the 1930s, due in part to shocks from nonmember banks and because the Fed’s decentralized structure hampered a vigorous response to national crises. |
| Keywords: | Federal Reserve; banking crises; banking panics; interbank market; correspondent banks; contagion; Great Depression |
| JEL: | E58 G21 N21 N22 |
| Date: | 2015–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2015-037&r=mac |
| By: | Peek, Joe (Federal Reserve Bank of Boston); Rosengren, Eric S. (Federal Reserve Bank of Boston) |
| Abstract: | Events that transpired during the recent financial crisis highlight the important role that financial intermediaries still play in the economy, especially during economic downturns. While the breadth and severity of the financial crisis took most observers by surprise, it has renewed academic interest in understanding the effects on the real economy of both financial shocks and the changing nature of financial intermediation. This interest in the real effects of financial shocks highlights a literature that began more than 20 years ago associated with the bank credit crunch of the early 1990s. It is useful to reflect on what we thought we had learned from that research and how that research has helped to guide policy in the more recent crisis. |
| Keywords: | financial crisis; credit availability; financial intermediaries; liquidity; shadow banking; financial innovations |
| JEL: | E44 E51 G21 G23 G28 |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbcq:2015_005&r=mac |
| By: | Congressional Budget Office |
| Abstract: | CBO’s estimate of the output gap—the percentage difference between actual and potential output—gauges slack or overheating in the economy. For the latter half of its 10-year projection period, CBO projects that actual output will grow at the same rate as potential output but fall short of potential by about half a percent, on average—matching the average estimated gap between actual and potential output from 1961 to 2009. |
| JEL: | E20 E27 O47 |
| Date: | 2015–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:498901&r=mac |
| By: | Congressional Budget Office |
| Abstract: | CBO’s estimate of the output gap—the percentage difference between actual and potential output—gauges slack or overheating in the economy. For the latter half of its 10-year projection period, CBO projects that actual output will grow at the same rate as potential output but fall short of potential by about half a percent, on average—matching the average estimated gap between actual and potential output from 1961 to 2009. |
| JEL: | E20 E27 O47 |
| Date: | 2015–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:498900&r=mac |
| By: | Congressional Budget Office |
| Abstract: | Under budgetary paths specified by Chairman Ryan, total deficits and debt would be smaller in future years than they would be under CBO's extended baseline. Economic output would be lower in the next few years but higher thereafter. Those projections do not represent an analysis of any specific policies, and CBO has not considered whether the specified paths are consistent with the policies or budget numbers in Chairman Ryan's proposed budget resolution. |
| JEL: | E62 H68 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:452111&r=mac |
| By: | Congressional Budget Office |
| Abstract: | Under budgetary paths specified by Chairman Ryan, total deficits and debt would be smaller in future years than they would be under CBO's extended baseline. Economic output would be lower in the next few years but higher thereafter. Those projections do not represent an analysis of any specific policies, and CBO has not considered whether the specified paths are consistent with the policies or budget numbers in Chairman Ryan's proposed budget resolution. |
| JEL: | E62 H68 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:report:452110&r=mac |
| By: | Magdalena Petrovska (National Bank of the Republic of Macedonia); Ljupka Georgievska (National Bank of the Republic of Macedonia) |
| Abstract: | This paper applies a SVAR model which combines different monetary policy instruments to construct an alternative indicator of monetary policy stance in Macedonia. It employs the approach introduced by Bernanke and Mihov (1998) of isolating monetary policy shocks from the whole set of monetary policy instruments that otherwise react to real developments. The residuals from such VAR are cleaned from the central bank’s reaction function and represent true monetary policy innovations. Furthermore, we solve the interdependence among different monetary policy instruments contained in the residuals by developing a structural model. We use the model to extract unanticipated policy stance, as an alternative view on the monetary policy. |
| Keywords: | SVAR, Monetary policy stance, Monetary framework |
| JEL: | E50 E52 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2015-07&r=mac |
| By: | Leena Rudanko (Federal Reserve Bank of Philadelphia); Per Krusell (Institute for International Economic Studies (IIES); University of Göteborg; CEPR; NBER) |
| Abstract: | We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. Frictions render existing matches a form of firm-specific capital which is subject to a hold-up problem in a unionized labor market. We study how this hold-up problem manifests itself in a dynamic infinite horizon model, with fully rational agents. We find that wage solidarity, seemingly an important norm governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions due to hold-up. Introducing a tenure premium in wages may allow the union to avoid the problem entirely, however, potentially allowing efficient hiring. Under an egalitarian wage policy, the degree of commitment to future wages is important for outcomes: with full commitment to future wages, the union achieves efficient hiring in the long run, but hikes up wages in the short run to appropriate rents from firms. Without commitment, and in a Markov-perfect equilibrium, hiring is well below its efficient level both in the short and the long run. We demonstrate the quantitative impact of the union in an extended model with partial union coverage and multi-period union contracting. |
| Keywords: | Labour unions, frictional labour markets, time inconsistency, limited commitment, long-term contracting |
| JEL: | E02 E24 J51 J64 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1531&r=mac |
| By: | Aitor Erce (European Stability Mechanism) |
| Abstract: | Measures of sovereign and bank risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro area countries. The results show that sovereign risk feeds back into bank risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from sovereign risk into bank risk. In the opposite direction, in countries where banks fund their activities with more foreign credit and support larger levels of non-performing loans, the feedback from bank risk into sovereign risk is stronger. According to model estimates, financial rescue operations can increase feedback effects from bank risk into sovereign risk. These results can be useful for the official sector when deciding on the form of financial rescues. |
| Keywords: | Sovereign Risk, Bank Risk, Feedback Loops, Balance Sheet Exposure, Leverage |
| JEL: | E58 G21 G28 H63 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:1&r=mac |
| By: | Danica Unevska-Andonova (National Bank of the Republic of Macedonia); Dijana Janevska-Stefanova (National Bank of the Republic of Macedonia) |
| Abstract: | In the analysis of public and external debt sustainability the National Bank of the Republic of Macedonia is actively using the IMF’s Debt Sustainability Analysis (DSA) framework. The aim of our analysis is to improve the analytical power of the IMF’s DSA framework, in the case of Macedonia. This paper uses simple framework, based on methodology used in Adler and Sosa (2013), that integrates econometric estimates of the effect of global factors on key domestic variables that determine public and external debt dynamics, within the IMF‘s standard debt sustainability framework. VAR estimation is used in obtaining the forecasts of key domestic variables, conditional on a set of assumed global variables under different global shock scenarios. The results in general suggest that under all shock scenarios, there is negative effect to domestic GDP, however in the case of current account there is negative effect in the beginning of the period of applied shocks, but positive in the later period. Consequently, the expected effect to public debt sustainability is negative for the whole period due to lower real GDP growth. However, regarding external debt sustainability, negative effect is expected in the first year or two due to lower GDP growth and higher current account deficit, yet, in a medium run, external sustainability might not be jeopardized as the lower GDP growth might be neutralized by the lower current account deficit. |
| Keywords: | public debt, external debt, debt sustainability, Macedonia |
| JEL: | C32 E60 F42 F47 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2015-10&r=mac |
| By: | Shaista Amod; Shakill Hassan |
| Abstract: | At what level does a currency’s volatility become ‘excessive’, in a concrete sense? Any claim that an exchange rate is excessively volatile needs a benchmark for ‘normal’ variability. We compute variance bounds implied by exchange rate models as the norm, for a set of particularly volatile emerging market currencies; and find that long-run exchange rate volatility does not breach the upper bound implied by the present value of underlying fundamentals - for each currency in our sample, except the Brazilian real. However, nominal exchange rate variances get closer to implied upper bounds under inflation targeting. We also find a reduction in real exchange rate misalignment under inflation targeting. |
| Date: | 2014–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6516&r=mac |
| By: | Stan du Plessis; Ben Smit; Rudi Steinbach |
| Abstract: | In this paper a dynamic stochastic general equilibrium (DSGE) model is specified for the South African economy. Nominal and real frictions help to make the model estimable, and is then estimated on South African and global data using Bayesian techniques. The empirical fit of the model is validated through a forecast comparison with private sector consensus forecasts. The model is found to outperform the inflation forecasts of private sector economists. |
| Date: | 2014–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6319&r=mac |
| By: | Caballero, Julian; Panizza, Ugo; Powell, Andrew |
| Abstract: | Recent work suggests that non-financial firms have acted like financial intermediaries particularly in emerging economies. We corroborate these findings but then ask why? Our results indicate evidence for carry-trade activities but focused in countries with higher levels of capital controls, particular controls on inflows. We find little evidence for such activities given other potential motives. We posit that this phenomenon is due more to the reaction to low global interest rates and strong capital inflows than to incomplete markets or the retreat of global banks due to impaired balance-sheets or tighter regulations. |
| Keywords: | bond issuance; capital controls; carry-trade; corporate finance; currency mismatches |
| JEL: | E51 F30 F33 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10926&r=mac |
| By: | Uddin, Md Akther; Halim, Asyraf |
| Abstract: | At the advent of global financial crisis conventional monetary policy has failed to regulate the money market and the consequence of which was seen in the global financial and capital market. This paper takes an attempt to give a brief outline of how Islamic monetary policy can be a sustainable alternative to the conventional. In order to understand Islamic monetary policy better we went back to early Islamic period and discussed how money was evolved and monetary policy was performed at that time. Reemergence of Islamic economic system in the latter half of the last century encouraged scholars in this field to have a fresh look at this issue. Comparative analysis shows that Islamic monetary policy can adopt many conventional instruments which are in line with the Shariah guidance such as: Legal Reserve Ratio, Credit Rationing, Selective credit control, Issue of directive, and Moral suasion etc. As interest rate, the key tool of conventional monetary policy regulation, is prohibited in Islamic economic system, the need for sustainable alternative is the order of the day. Unfortunately, Islamic banks and financial institutions set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. Literature shows that this a growing field of knowledge and many theoretical works have been conducted in this area but little empirical work, moreover, very few on alternative benchmark for Islamic economic system. By analyzing literature we propose in our study that GDP growth rate adjusted for inflation can be set as a benchmark for money market instrument and reference for financial and capital market as we argue GDP growth rates reflect real balanced growth potential of an economy as it is correlated with national income, savings, inflation, exchange rate and investment compare to real interest rate, which is fixed in the money market and does not take into account the real sector. |
| Keywords: | Monetary Policy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings, Foreign Direct Investment and Gross National Income |
| JEL: | A1 E4 N1 |
| Date: | 2015–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67697&r=mac |
| By: | Badel, Alejandro (Federal Reserve Bank of St. Louis); Huggett, Mark (Georgetown University) |
| Abstract: | We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models. One of the elasticities that enters our formula has been estimated in the elasticity of taxable income literature. We apply standard empirical methods from this literature to data produced by reforming the tax system in a model economy. We find that these standard methods underestimate the relevant elasticity in models with endogenous human capital accumulation. |
| Keywords: | Sufficient Statistic; Laffer Curve; Marginal Tax Rate; Elasticity |
| JEL: | D91 E21 H2 J24 |
| Date: | 2015–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2015-038&r=mac |
| By: | Mauro Napoletano (OFCE Sciences Po Skema Busibess School); Andrea Roventini (OFCE-SciencesPo & Skema Business School); Jean Luc Gaffard (OFCE Sciences Po & Skema Business School) |
| Abstract: | We build an agent-based model populated by households with heterogenous and time-varying nancial conditions in order to study how scal multipliers can change over the business cycle and are aected by the state of credit markets. We nd that deficit-spending scal policy dampens the eect of bankruptcy shocks and lowers their persistence. Moreover, the size and dynamics of government spending multipli- ers are related to the degree and persistence of credit rationing in the economy. On the contrary, in presence of balanced-budget rules, output permanently falls below pre-shock levels and the ensuing multipliers fall below one and are much lower than the ones emerging from the deficit-spending policy. Finally, we show that dierent conditions in the credit market significantly aect the size and the evolution of fiscal multipliers |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1525&r=mac |
| By: | Antonio Bianco (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).) |
| Abstract: | A simple stock-flow consistent methodological account of the influence of financial markets over the real economy is here presented. The model is so devised as to allow a tidy comparison of relationship or shadow banking interpreted as alternative schemes of liquidity (not credit) risk management. The essential mechanism that is here at work is that fluctuations in the composition of property incomes lead to fluctuations in borrowing for non-financial purposes that, in their turn, drive fluctuations in spending. Having this in mind, the model emphasizes the interdependencies in entrepreneurs’ variations in animal spirits, financial institutions’ idiosyncratic liquidity risk management (ILRM), and households’ effective demand. The model key finding is that both relationship and shadow banking entail a pro-cyclical impact and that differences implied in the two cases can be reduced to the different ILRM aggregate cost functions. As for policy implications, the model suggests that securitisation is not per se leading to financial unsustainability, yet regulatory measures aimed at checking predatory lending and the CDO industry are needed: failing these, securitisation is likely to have a depressive impact on non-financial entrepreneurs’ confidence, and hence on the financial sustainability of a growth process. |
| Keywords: | animal spirits, endogenous money, liquidity risk management, securitisation, originate-to-hold, originate-to-distribute. |
| JEL: | B52 E12 E20 E44 M40 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:05/15&r=mac |
| By: | Antonello D’Agostino (ESM) |
| Abstract: | This paper investigates how well consumer confidence predicts households future consumption expenditure. Our findings document considerable variety in the degree to which confidence measures accurately forecast consumption across selected euro area countries and periods. First, we explore the leading role of consumer confidence in forecasting consumption growth. We find that the consumer confidence index improves forecasts of household consumption expenditure appreciably during times of financial distress, especially in Italy and Portugal. Further, we show that the financial sub-index of consumer confidence provides more nuanced information than the aggregate index. Indeed, over the past few years, expectations about future personal financial situations proved particularly helpful in forecasting total consumption expenditure in France, Italy and Portugal. For Germany, in contrast, no measures of confidence provide information beyond what is supplied by other economic indicators for forecasting household consumption. Finally, we advance some evidence to support the idea that changes in consumer confidence are an independent driver of economic fluctuations. |
| Keywords: | Expectations; Survey Data; Consumption Forecast; Confidence Shocks; Economic Fluctuations |
| JEL: | C32 E24 E32 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:2&r=mac |
| By: | Assessment of CIS Countries Readiness for Creation of Currency Union (Gaidar Institute for Economic Policy; Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Mironov, Alexey (Gaidar Institute for Economic Policy) |
| Abstract: | The authors analyze the CIS countries’ potential readiness to establish a currency union. Based on Optimum Currency Area (OCA) criteria that determine the countries’ readiness to form a currency union and some particular benefits and costs of a currency union several macroeconomic indicators are determined area. The authors analyze the period following the final transformation of CIS countries’ economies from centrally planned to the market ones – from 1999 to 2011. The paper also tests the stability of the results obtained to check the adequacy of obtained estimates and for ranging countries by their matching OCA criteria. |
| Keywords: | monetary union, optimal currency area, integration, exchange rate |
| JEL: | E42 F33 F36 |
| Date: | 2014–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:ppaper:dok19&r=mac |
| By: | Cugnasca, Alessandro; Rother, Philipp |
| Abstract: | This paper investigates the impact of fiscal consolidation on economic growth in European Union countries, between 2004 and 2013. We construct a new dataset of exogenous fiscal adjustments, relying on legally binding recommendations issued to countries under Excessive Deficit Procedure, and we identify exogenous policy changes by using this dataset as instrumental variable in a GMM framework. We estimate the size of the fiscal multiplier both in a linear setting as well as in a state-dependent setting, considering four different circumstances: the state of the business cycle, the degree of openness to trade, the composition of the fiscal adjustment and the presence of a stressed credit market, as manifested by an impaired monetary policy transmission. We find that the size of the multiplier varies significantly under the various states: the distribution of multipliers is quite asymmetric, and a few consolidation episodes yield multipliers above one. We find that the composition of the fiscal adjustments is crucial in containing the output cost of consolidation, and in determining its persistence. Fiscal adjustments made via cuts to transfers and subsidies, or via tax increases, are usually associated with multipliers at or below unity, even when the economy is in recession. We also find evidence of confidence effects when consolidation is made under stressed credit markets and high interest rates. In a small number of episodes, involving open economies benefitting from confidence effects, we find that fiscal adjustments seem to be expansionary. JEL Classification: C33, E62 |
| Keywords: | fiscal multiplier, fiscal policy and growth, panel data |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151863&r=mac |
| By: | Luara Coroneo |
| Abstract: | In the context of a state-space model for nominal and TIPS yields, we identify the liquidity premium in the TIPS market as the common component in TIPS yields unspanned by nominal yields. Using daily US yields, we find that the TIPS liquidity premium explains up to 22% of the variation in TIPS yields and that it sharply spiked during the recent financial crisis. A counterfactual exercise shows that the QE2 program had only limited effects on the liquidity premium in the TIPS market. |
| Keywords: | TIPS, Liquidity Premium, Factor models, Quantitative Easing |
| JEL: | C33 C53 E43 G12 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:15/23&r=mac |
| By: | Halkos, George; Paizanos, Epameinondas |
| Abstract: | The economic implications of government expenditure have been shown to be significant and broad. In particular, government spending has been shown to enhance long-run economic growth by increasing the level of human capital and Research and Development (R&D) expenditure, and by improving public infrastructure. On the other hand, there is evidence that a greater size of government spending may be less efficient and therefore not necessarily associated with a better provision of public goods and higher levels of economic growth. Moreover, it is likely that the size of government expenditure and its composition are associated with key aspects of the quality of growth, such as income inequality and environmental sustainability. This paper presents a review of the theoretical and empirical literature on the relationship between fiscal policy and economic activity, both in terms of long-run economic growth and short-term output fluctuations. In general, empirical evidence on these relationships is not robust and remains inconclusive. |
| Keywords: | Fiscal policy; Economic growth; Government Expenditure; Taxation. |
| JEL: | E62 H2 H5 O44 O47 Q01 Q56 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67737&r=mac |
| By: | Zhongjun Qu (Boston University); Fan Zhuo (Boston University) |
| Abstract: | Markov regime switching models are widely considered in economics and finance. Although there have been persistent interests (see e.g., Hansen, 1992, Garcia, 1998, and Cho and White, 2007), the asymptotic distributions of likelihood ratio based tests have remained unknown. This paper considers such tests and establishes their asymptotic distributions in the context of non- linear models allowing for multiple switching parameters. The analysis simultaneously addresses three difficulties: (i) some nuisance parameters are unidentified under the null hypothesis, (ii) the null hypothesis yields a local optimum, and (iii) conditional regime probabilities follow stochastic processes that can only be represented recursively. Addressing these issues permits substantial power gains in empirically relevant situations. Besides obtaining the tests' asymptotic distributions, this paper also obtains four sets of results that can be of independent interest: (1) a characterization of conditional regime probabilities and their high order derivatives with respect to the model's parameters, (2) a high order approximation to the log likelihood ratio permitting multiple switching parameters, (3) a refinement to the asymptotic distribution, and (4) a unified algorithm for simulating the critical values. For models that are linear under the null hypothesis, the elements needed for the algorithm can all be computed analytically. The above results also shed light on why some bootstrap procedures can be inconsistent and why standard information criteria, such as the Bayesian information criterion (BIC), can be sensitive to the hypothesis and the model's structure. When applied to the US quarterly real GDP growth rates, the methods suggest fairly strong evidence favoring the regime switching specification, which holds consistently over a range of sample periods. |
| Keywords: | Hypothesis testing, likelihood ratio, Markov switching, nonlinearity |
| JEL: | C12 C22 E32 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-004&r=mac |
| By: | Majid M. Al-Sadoon |
| Abstract: | The methodology of multivariate Granger non-causality testing at various horizons is extended to allow for inference on its directionality. This paper presents empirical manifestations of these subspaces and provides useful interpretations for them. It then proposes methods for estimating these subspaces and finding their dimensions utilizing simple vector autoregressions modelling that is easy to implement. The methodology is illustrated by an application to empirical monetary policy. |
| Keywords: | Granger causality, VAR model, rank testing, Okun's law, policy trade-offs |
| JEL: | C12 C13 C15 C32 C53 E3 E4 E52 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:850&r=mac |
| By: | Luis Eduardo Arango; Freddy Felipe Parra; Álvaro José Pinzón |
| Abstract: | Presentamos la evolución de una decena de variables a lo largo del ciclo económico para distintas ciudades y grupos demográficos. Las fechas utilizadas para identificar las fases de recesión fueron tomadas de Alfonso et al. (2013). Se encuentra que la participación laboral aumenta en las contracciones mientras que la tasa de ocupación cae. La suma de estos dos hechos permite predecir sin ambigüedades que en las recesiones el desempleo aumenta. En particular, los cesantes, más que los aspirantes, siempre aumentan en los momentos de crisis; es decir, los despidos y la reinserción al mercado parecen ser los eventos más regulares durante los períodos de crisis. Los salarios y las horas trabajadas caen en las recesiones mientras que el subempleo por horas aumenta. La relación de asalariados a población en edad de trabajar se constituye en una variable clave para el estudio de las fases del ciclo ya que siempre se contrae durante las recesiones. |
| Keywords: | Ciclos económicos, tasa de participación, tasa de ocupación, tasa de desempleo, salarios. |
| JEL: | J0 E3 |
| Date: | 2015–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:013962&r=mac |
| By: | Carneiro, Pedro (University College London); Lopez Garcia, Italo (RAND); Salvanes, Kjell G. (Norwegian School of Economics); Tominey, Emma (University of York) |
| Abstract: | We extend the standard intergenerational mobility literature by modelling individual outcomes as a function of the whole history of parental income, using data from Norway. We find that, conditional on permanent income, education is maximized when income is balanced between the early childhood and middle childhood years. In addition, there is an advantage to having income occur in late adolescence rather than in early childhood. These result are consistent with a model of parental investments in children with multiple periods of childhood, income shocks, imperfect insurance, dynamic complementarity, and uncertainty about the production function and the ability of the child. |
| Keywords: | child human capital, intergenerational mobility, parental income timing, semiparametric estimation |
| JEL: | J24 E24 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9479&r=mac |
| By: | Zhongjun Qu (Boston University); Denis Tkachenko (National University of Singapore) |
| Abstract: | This paper presents a framework for analyzing global identification in log linearized DSGE models that encompasses both determinacy and indeterminacy. First, it considers a frequency domain expression for the Kullback-Leibler distance between two DSGE models, and shows that global identification fails if and only if the minimized distance equals zero. This result has three features. (1) It can be applied across DSGE models with different structures. (2) It permits checking whether a subset of frequencies can deliver identification. (3) It delivers parameter values that yield observational equivalence if there is identification failure. Next, the paper proposes a measure for the empirical closeness between two DSGE models for a further understanding of the strength of identification. The measure gauges the feasibility of distinguishing one model from another based on a finite number of observations generated by the two models. It is shown to be equal to the highest possible power in a Gaussian model under a local asymptotic framework. The above theory is illustrated using two small scale and one medium scale DSGE models. The results document that certain parameters can be identified under indeterminacy but not determinacy, that different monetary policy rules can be (nearly) observationally equivalent, and that identification properties can differ substantially between small and medium scale models. For implementation, two procedures are developed and made available, both of which can be used to obtain and thus to cross validate the findings reported in the empirical applications. Although the paper focuses on DSGE models, the results are also applicable to other vector linear processes with well defined spectra, such as the (factor augmented) vector autoregression. |
| Keywords: | Dynamic stochastic general equilibrium models, frequency domain, global identification, multiple equilibria, spectral density |
| JEL: | C10 C30 C52 E1 E3 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-002&r=mac |
| By: | Ferlito, Carmelo |
| Abstract: | The present paper aim to develop the Austrian Theory of Business Cycle in order to conclude that economic fluctuations are unavoidable. The conventional version of Austrian business cycle theory focuses on a temporary imbalance between natural and monetary rates of interest. When, because of the role of monetary authorities in defining the monetary rate, the two values are in a situation of imbalance, the resulting expansion stage is followed by a recession. On the other hand, if instead the expansive phase arises without any interference by monetary authorities but through re-adaptation of the productive structure to a modified structure of temporal preferences, a period of sustainable growth begins that will not be followed by a crisis. The purpose of this essay is to demonstrate, on the other hand, that because of profit-expectations and the combined action of Schumpeterian elements (imitations-speculations and the ‘creation of money’ by banks), even a so-called ‘sustainable’ boom will be affected by a liquidation and settling crisis. What distinguishes the latter situation from the conventional case of imbalance between monetary and natural rates is not the onset or otherwise of a crisis but, rather, its intensity and duration. We will define as natural an economic cycle characterised by a stage of expansion considered to be ‘sustainable’ in the Austrian theory but followed by an inevitable readjustment crisis. In conclusion we will try to link our theoretical conclusions with the crisis emerged in the Western world in 2007, to test the explanatory power of our theoretical framework. |
| Keywords: | Economic Crises, Business Cycles, Schumpeter, Lachmann, Hayek, Austrian Economics, Expectations. |
| JEL: | B13 B25 B31 B53 E32 E58 O33 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67708&r=mac |
| By: | Ferlito, Carmelo |
| Abstract: | The conventional version of Austrian business cycle theory focuses on a temporary imbalance between natural and monetary rates of interest. When, because of the role of monetary authorities in defining the monetary rate, the two values are in a situation of imbalance, the resulting expansion stage is followed by a recession. On the other hand, if instead the expansive phase arises without any interference by monetary authorities but through re-adaptation of the productive structure to a modified structure of temporal preferences, a period of sustainable growth begins that will not be followed by a crisis. The purpose of this essay is to demonstrate, on the other hand, that because of profit expectations and the combined action of Schumpeterian elements (imitations-speculations and the ‘creation of money’ by banks), even a so-called ‘sustainable’ boom will be affected by a liquidation and settling crisis. What distinguishes the latter situation from the conventional case of imbalance between monetary and natural rates is not the onset or otherwise of a crisis but, rather, its intensity and duration. We will define as natural an economic cycle characterised by a stage of expansion considered to be ‘sustainable’ in the Austrian theory but followed by an inevitable readjustment crisis. |
| Keywords: | Hayek, Schumpeter, Lachmann, Expectations, Business Cycles |
| JEL: | B13 B25 B31 B53 E32 |
| Date: | 2014–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67712&r=mac |
| By: | EZZAHIDI, Elhadj; El Alaoui, Aicha |
| Abstract: | Growth performance of African countries since their independence in the late 1950s until mid-1990s is qualified by many scholars as a tragedy. Geography, ethnic fractionalization, conflicts and wars, bad policies, predatory elites, and many other phenomena were the factors presumed to explain the poor or catastrophic growth performance of the bulk of African countries. Fortunately, a revival of the economic growth in the majority of African countries is observed since mid-1990s. Identification of the factors that are instrumental of this growth’s surge is of prime importance for policy makers. It is so because growth is the condition, even not sufficient one, to poverty reduction and improvement of standards of life in Africa. In spite of the structural differences between African countries, many factors affect their economies in the same manner. One major result of our paper is that contrary to what is the common belief in the 1970s, 1980s and the first half of the 1990s, investment was positively linked to growth in African countries in the period 2000-2009. |
| Keywords: | Africa, Economic Growth, Real GDP |
| JEL: | E20 E22 E27 O47 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67792&r=mac |
| By: | Alessandra Colombelli (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS); Jackie Krafft (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS); Francesco Quatraro (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS, Department of Economics, University of Turin - University of Turin) |
| Abstract: | This paper analyzes the contribution of high-growth firms to the process of knowledge creation. We articulate a demand-pull innovation framework in which knowledge creation is driven by sales growth, and knowledge stems from creative recombination. Given the established literature on high growth firms and economic growth, we wonder whether gazelles follow patterns of knowledge creation mostly dominated by exploration or exploitation strategies. To this purpose, we derive indicators able to describe the structure of knowledge and qualify firms' innovation strategies. The empirical results suggest that the reality is richer than the interpretative frameworks. Increasing growth rates are indeed associated to exploration strategies, supporting the idea that high growth firms are key actors in the creation of new technological knowledge. But in the meantime, firms showing growth rates significantly higher than the average are able to command the exploration strategies by constraining them within the boundaries of familiar technological competences, suggesting that the exploration process is less random than anticipated. We end up with the result that high growth firms, and especially gazelles, follow predominantly an exploration strategy, but with the characteristics of an organized search which is often more observed in an exploitation strategy. |
| Keywords: | Gazelles,Recombinant Knowledge,Schumpeterian innovation patterns |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00666707&r=mac |
| By: | Joshua C.C. Chan |
| Abstract: | We propose an easy technique to test for time-variation in coefficients and volatilities. Specifically, by using a noncentered parameterization for state space models, we develop a method to directly calculate the relevant Bayes factor using the Savage-Dickey density ratio—thus avoiding the computation of the marginal likelihood altogether. The proposed methodology is illustrated via two empirical applications. In the first application we test for time-variation in the volatility of inflation in the G7 countries. The second application investigates if there is substantial time-variation in the NAIRU in the US. |
| Keywords: | Bayesian model comparison, state space, inflation uncertainty, NAIRU |
| JEL: | C11 C32 E31 E52 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2015-42&r=mac |
| By: | Michael Weber (University of Chicago); Daniel Hoang (Karlsruhe Institute of Technology); Francesco D'Acunto (University of California at Berkeley) |
| Abstract: | We document a positive cross-sectional association between households' inflation expectations and their willingness to purchase durable consumption goods. Households that expect inflation to increase are 8% more likely to have a positive spending attitude compared to households that expect constant or decreasing inflation. This positive association is higher for more educated households, working-age households, high-income households, and urban households. We use novel German survey data for the period from 2000 to 2013 to establish these facts. To obtain identification, we exploit an unexpected shock to households' inflation expectations: the newly-appointed administration unexpectedly announced in November 2005 a three percentage point increase in the value-added tax (VAT) effective in 2007. The unexpected VAT increase led to an exogenous increase in inflation expectations which had a large positive effect on the willingness to spend on durables. Our findings suggest that fiscal and monetary policy measures that engineer higher inflation expectations may be successful in stimulating consumption expenditures. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1266&r=mac |
| By: | Roger Fouquet; Stephen Broadberry |
| Abstract: | This paper investigates very long run pre-industrial economic development. New annual GDP per capita data for six European countries over the last seven hundred years paint a clearer picture of the history of European economic development. First, the paper confirms that sustained growth has been a recent phenomenon, but rejects the argument that there was no long run growth in living standards before the Industrial Revolution. Instead, the evidence demonstrates the existence of numerous periods of economic growth before the nineteenth century - unsustained, but raising GDP per capita. It also shows that many of these economies experienced substantial economic decline. Thus, rather than being stagnant, pre-nineteenth century European economies experienced a great deal of change. Finally, it offers some evidence that, from the nineteenth century, these economies increased the likelihood of being in a phase of economic growth and reduced the risk of being in a phase of economic decline. |
| Keywords: | history of economic development; economic growth; economic decline |
| JEL: | E01 N13 O11 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:63626&r=mac |
| By: | Raphael Schoenle (Brandeis University); Michael Weber (University of Chicago Booth School of Bu); Ernesto Pasten (Central Bank of Chile) |
| Abstract: | In a multi-sector New-Keynesian model where input-output linkages between firms create a productive network, we study the interaction between sectoral heterogeneity in price rigidities and sectoral heterogeneous input-output linkages. Our goal is to explore the implications of these two forms of heterogeneity in (1) the real effects of monetary policy, (2) the aggregate propagation of sectoral idiosyncratic shocks, and (3) the pass-though to aggregate inflation of an oil price shocks. We show that the effects of this interaction is significant after calibrating our model to the US economy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1217&r=mac |
| By: | Howard Kung (London Business School); Gonzalo Morales (University of British Columbia); Francesco Bianchi (Cornell University) |
| Abstract: | This paper estimates monetary and fiscal policy rules using a New Keynesian model that allows for changes in the monetary/fiscal policy mix, generates a sizeable bond risk premia, and takes into account the effects of the zero lower bound. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1224&r=mac |
| By: | Shakill Hassan; Merrisa Paul; Siobhan Redford |
| Abstract: | A simple ratio of foreign exchange reserves to the gross external financing requirement (GEFR) largely explains the cross-sectional variation in exchange rate depreciation over the taper tantrum in 2013. We update the ratio for a set of emerging markets, and compare current to previous exposure. South Africa’s relative position barely changed between mid-2013 and early 2015. In contrast, India rapidly increased its ratio of reserves-to-GEFR through improvements in each component of the indicator; and forcefully reduced inflation. We document a reduction in high-frequency reactions of the rupee to FOMC meetings. Reducing vulnerability to imminent tightening in US monetary policy requires, above all, reducing the external financing requirement and/or increasing the stock of reserves. |
| Date: | 2015–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6941&r=mac |
| By: | Giacomo Rodano; Nicolas Serrano-Velarde; Emanuele Tarantino |
| Abstract: | We empirically identify the lending standards applied by banks to small and medium firms over the cycle. We exploit an institutional feature of the Italian credit market that generates a sharp discontinuity in the allocation of comparable firms into credit risk categories. Using loan-level data, we show that during the expansionary phase of the cycle, banks relax lending standards by narrowing the interest rate spreads between substandard and performing firms. During the contractionary phase of the cycle, the abrupt tightening of lending standards leads to the exclusion of substandard firms from credit. These firms then report significantly lower production, investment, and employment. Finally, we find that the drying up of the interbank market is an important factor determining the change in bank lending standards. JEL classification: E32, E44, G21. Keywords: Credit Cycles; Financial Contracts; Credit Rationing; Real Activity. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:563&r=mac |
| By: | Bullard, James B. (Federal Reserve Bank of St. Louis) |
| Abstract: | During the St. Louis Regional Chamber Financial Forum, St. Louis Fed President James Bullard said that any decision on whether to increase the policy rate from near-zero levels will be data-dependent. He also discussed five key questions for the FOMC; they relate to global uncertainty, U.S. financial conditions, labor markets, inflation and the dollar. |
| Date: | 2015–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:255&r=mac |
| By: | Yikai Wang (University of Oslo); Hans Holter (University of Oslo); Marcus Hagedorn (University of Oslo) |
| Abstract: | In this paper we consider an optimal taxation problem in an incomplete markets model to study the optimal quantity of capital and debt. The government commits itself ex-ante to a tax schedule and government debt. In contrast to most of the existing literature these instruments are chosen to to maximize agents' discounted present value of lifetime utility. Whereas the literature mainly focuses on characterizing the steady state which maximizes welfare, we characterize and compute the optimal policy along the full transition path. In particular our characterization takes into account that the optimal long-run policy depends on capital, debt and taxation during the transition path. We show theoretically that it is optimal to equalize the pre-tax return on capital and the rate of time preference in the long-run, i.e. the capital stock satisfies the modified golden-rule. Quantitatively we find that the tax on capital is around 3 percent in the long-run. Labor is taxed at a much higher rate where the precise number depends on the labor supply elasticity. For standard choices for this elasticity we find a labor tax rate of almost 40 percent to be optimal in the long-run. The reason for such a hight tax rate on labor income is that labor income is risky. Taxing this risky income and redistributing it back through lump-sum transfers improves ex-ante welfare in the long-run. Transfers and the optimal level of debt along the transition are chosen to equalize the amount of redistribution over time. Initially capital is taxed higher than in the long-run since it is inelastically supplied whereas labor is taxed less than in steady state. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1220&r=mac |
| By: | Van Elk, Roel; Verspagen, Bart (UNU-MERIT); Ter Weel, Bas; Van der Wiel, Karen; Wouterse, Bram |
| Abstract: | This paper analyses the economic returns to public R&D investments in 22 OECD countries. We exploit a dataset containing time series from 1963 to 2011 and estimate and compare the outcomes of different types of production function models. Robustness analyses are performed to test the sensitivity of the outcomes for particular model specifications, sample selections, assumptions with respect to the construction of R&D stocks, and variable definitions. Analyses based on Cobb-Douglas and translog production functions mostly yield statistically insignificant or negative returns. In these models we control for private and foreign R&D investments and the primary production factors. Models including additional controls, such as public capital, the stock of inward and outward foreign direct investment, and the shares of high-tech imports and exports, yield more positive returns. Our findings suggest that public R&D investments do not automatically foster GDP and TFP growth. The economic return to scientific research seems to depend on the specific national context. |
| Keywords: | science, knowledge, public R&D, economic growth, total factor productivity |
| JEL: | I23 O11 O40 O47 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2015042&r=mac |
| By: | Igor Lebrun |
| Abstract: | The uncertainty surrounding the estimates of potential output has risen in the euro area countries since the outbreak of the financial crisis. Moreover, potential growth in the euro area has fallen since 2009. In this working paper we examine both phenomena for Belgium based on potential GDP estimates produced by the Federal Planning Bureau. We also analyse the evolution of the three main underlying determinants of potential growth, namely the contribution of labour, capital and total factor productivity. |
| JEL: | C5 E1 O47 |
| Date: | 2015–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:fpb:wpaper:1504&r=mac |
| By: | Luigi Iovino (Bocconi University); Jennifer La'O (Columbia University); George-Marios Angeletos (M.I.T.) |
| Abstract: | Does welfare improve when firms have more information about the state of the economy and can better coordinate their production and pricing decisions? We address this question in a business-cycle model that highlights how informational frictions can be the source of both nominal and real rigidity. We then elaborate on how the answer to this question depends on each of these rigidities, on the sources of the business cycle, and on the conduct of monetary policy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1299&r=mac |
| By: | Francesco Sergi (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS) |
| Abstract: | The purpose of the article is to analyze and criticize the way how DSGE macroeconomists working in policy-making institutions think about the history of their own modeling practice. Our contribution is, first of all, historiographical: it investigates an original literature, emphasizing in the history of DSGE as it is told by its own practitioners. The results of this analysis is what we will call a “naïve history” of DSGE modeling. Modellers working from this perspective present their models as the achievement of a “scientific progress”, which is linear and cumulative both in macroeconomic theorizing and in the application of formalized methods and econometric techniques to the theory. This article also proposes a critical perspective about the naïve history of the DSGE models, which drawns, by contrast, the main lines of an alternative, “non-naïve” history. of the DSGE models is incomplete and imprecise. It mainly ignores controversies, failures and blind alleys in previous research; as a consequence, the major theoretical and empirical turning points are made invisible. The naïve history also provides an ahistorical account of assessment criteria for modeling (especially for evaluating empirical consistency), which hides the underlying methodological and epistemological debates. Finally, we will claim that the naïve history plays an active and rhetoric role in legitimizing the DSGE models as a dominant tool for policy expertise. |
| Abstract: | L'article propose d'analyser et de critiquer la manière dont les macroéconomistes actifs dans les institutions chargées de la politique économique et se situant dans l'approche DSGE (dynamic stochastic general equilibrium) conçoivent l'histoire de leur propre pratique de modélisation. Notre contribution est avant tout historiographique, traçant les contours d'un corpus original, mettant en évidence l'histoire des modèles DSGE telle qu'elle est racontée par ses protagonistes. Le résultat obtenu peut être qualifié d'historiographie « naïve » des modèles DSGE. Les modélisateurs actifs dans cette approche conçoivent leurs modèles comme le résultat abouti d'un « progrès scientifique », linéaire et continu, concernant à la fois la théorie macroéconomique sous-jacente aux modèles et l'application à ceux-ci des méthodes formelles et des techniques économétriques. Parallèlement à l'analyse du corpus, l'article propose une critique de l'histoire naïve des modèles DSGE, traçant les contours d'une histoire « non-naïve ». L'approche adoptée par les macroéconomistes est historiographiquement et méthodologiquement incomplète et imprécise. Les difficultés et les impasses sont ignorées, rendant invisibles les tournants (théoriques et empiriques) pour la discipline. De même, la présentation anhistorique des critères d'évaluation des modélisations (notamment l'évaluation des « performances empiriques ») occulte l'ensemble des débats méthodologiques et épistémologiques. Enfin, on mettra en évidence comment cette naïveté joue un rôle rhétorique actif, de légitimation des DSGE comme pratique dominante pour l'expertise des politiques économiques. |
| Keywords: | new neoclassical synthesis,history of macroeconomics,modelling methodology,central banks,rhetoric of economics,rhétorique de l'économie,méthodologie et modélisation,banques centrales,DSGE,nouvelle synthèse néoclassique,histoire de la macroéconomie |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01222798&r=mac |
| By: | Nikolova, Milena (IZA) |
| Abstract: | Along with political and economic changes, the fall of the socialist regimes in Central and Eastern Europe and the former Soviet Union brought about fundamental institutional reforms. Several studies have examined the causes of the increasing unhappiness which accompanied the transition process, including deteriorating public goods, rising inequality, income volatility, stagnating labor market conditions, and changing norms. Yet, few papers have sought explanations for the life satisfaction differentials between transition and non-transition economies. In this paper, I specifically examine the life satisfaction gap between post-socialist and advanced countries and the role of political institutions in explaining this gap. My results imply that both macroeconomic factors and the rule of law explain the overall life satisfaction differential between the advanced and transition societies. The rule of law had an additional role of reducing the happiness gap in the 1990s and may have even reversed it in the post-crisis years. As institutions and macroeconomic conditions continue to improve, post-socialist countries may complete their transformation processes and achieve quality of life levels comparable with those in the West. |
| Keywords: | subjective well-being, institutions, transition economies |
| JEL: | D02 E02 I31 P20 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9484&r=mac |
| By: | Charles Gottlieb (University of Cambridge); Maren Froemel (University of Cambridge) |
| Abstract: | Transfers have recently become the most important fiscal policy tool of the U.S. Government. Moreover, within the transfer category, refundable tax credits have reached the same magnitude as unemployment insurance, yet little research documents the macroeconomic implications of tax credits. The existing literature on the effect of tax credits, abstract from behavioral responses to policy changes and are silent on potential general equilibrium effects. This paper fills this gap by addressing these two shortcomings of the existing literature, by modeling the Earned Income Tax Credits (EITC) in an infinite horizon economy with exogenously incomplete asset markets and heterogeneous agents. In particular, we assess the welfare effects of the EITC and analyze how effective targeted transfers are in alleviating distortions arising from incomplete financial markets, and contribute to the debate on labor supply responses to EITC. We also conduct two policy exercises. First, we evaluate the impact of a more generous targeted transfer program on welfare and aggregate outcomes, and thereby uncover the distributional properties of this fiscal policy tool. Secondly, we assess whether targeted transfers are a better policy tool than lump sum transfers and show that targeted transfers are indeed welfare enhancing as they achieve more redistribution at lower tax rates, but that they lead to a less efficient production at the aggregate level. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1264&r=mac |
| By: | Kyriakos C. Neanidis |
| Abstract: | In this paper, we examine the links among macro-prudential regulation, the volatility of financial flows, and economic growth. In particular, we explore whether macroprudential regulation mitigates the adverse effects of capital flows volatility on economic growth. Using cross-country data for the period 1973-2013, we find that macroprudential regulation promotes economic growth by reducing the negative impact of volatile capital flows. The findings hold for both aggregate capital flows and their various components, while they are also robust for various indicators of macro-prudential policies. The results support the argument that macro-prudential policy rules designed to ensure financial stability are beneficial to long-run economic growth. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:215&r=mac |
| By: | Strulik, Holger |
| Abstract: | In this paper, I suggest a novel explanation for a hump-shaped ageconsumption profile, based on human aging. The model integrates health in the utility function and utilizes recent estimates on the effects of health on the marginal utility of consumption. The parsimonious model has a closed-form solution for the age of peak consumption and the consumption level at that age relative to initial consumption. A calibration of the model with data from gerontology produces an empirically plausible hump in consumption. |
| Keywords: | health,aging,life-cycle consumption |
| JEL: | D91 E21 I10 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:263&r=mac |
| By: | Böhm, Sebastian |
| Abstract: | The massive movement of capital and labor in opposite directions is the most striking characteristic of economic integration of Eastern and Western Germany. Beyond that, wage-setting behavior during the early years of unification and massive public social transfers have affected the transition path of the Eastern economy. In this paper, I set up a two-region open economy model with capital and labor mobility, wage-setting behavior, and public social transfers to explain major empirical trends of the German integration episode. I show that the model is able to replicate aggregate migration pattern in unified Germany and that wage-setting behavior has delayed labor productivity convergence between both German regions, whereas public social transfers have reduced the effect of wage setting on East-West net migration. |
| Keywords: | Economic Integration; German Reunification; Capital Mobility; Migration |
| JEL: | F20 E60 H20 J61 |
| Date: | 2015–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fri:fribow:fribow00463&r=mac |
| By: | Zhongjun Qu (Boston University) |
| Abstract: | This paper builds upon the composite likelihood concept of Lindsay (1988) to develop a framework for parameter identification, estimation, inference and forecasting in DSGE models allowing for stochastic singularity. The framework consists of the following four components. First, it provides a necessary and sufficient condition for parameter identification, where the identifying information is provided by the first and second order properties of the nonsingular submodels. Second, it provides an MCMC based procedure for parameter estimation. Third, it delivers confidence sets for the structural parameters and the impulse responses that allow for model misspecification. Fourth, it generates forecasts for all the observed endogenous variables, irrespective of the number of shocks in the model. The framework encompasses the conventional likelihood analysis as a special case when the model is nonsingular. Importantly, it enables the researcher to start with a basic model and then gradually incorporate more shocks and other features, meanwhile confronting all the models with the data to assess their implications. The methodology is illustrated using both small and medium scale DSGE models. These models have numbers of shocks ranging between one and seven. |
| Keywords: | business cycle, dynamic stochastic general equilibrium models, identification, impulse response, MCMC, stochastic singularity |
| JEL: | C13 C32 C51 E1 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-003&r=mac |
| By: | Sebastian Dyrda (University of Minnesota) |
| Abstract: | In this paper, I quantify the importance of microeconomic uncertainty shocks for the firm dynamics over the business cycle in an economy with frictional financial markets. To begin, I document facts on asymmetric response across age and size groups of firms in the U.S. to the changes in aggregate economic conditions. I argue that age rather than size is a relevant margin for the magnitude of employment volatility over the cycle; in particular total employment of young firms varies 2.6 times more relative to the old firms. Then I propose a theory that, contrary to the existing studies, generates endogenously a link between firm's age and size and its ability to obtain financing, and induces an asymmetric response to shocks. A key element of my theory is a financial friction originating from the presence of the firm's private information and long-term, efficient lending contract between a risk averse entrepreneur and financial intermediary, which manifests itself as a borrowing constraint. I argue that, for any given expected return on project, young firms are more constrained in borrowing and they grow out of the constraint as they age up to the optimal, unconstrained size. Next I establish that, for any given age, firm's financing increases in line with the average return on a project. In times of high idiosyncratic uncertainty the financial contract calls for tightening of the borrowing constraint transmitting the initial impulse into a decline in demand for production inputs and further, including general equilibrium effects, into an economic downturn. This mechanism affects disproportionally young firms. Not only are they more constrained in borrowing but also they start smaller due to a reduced level of initial financing. A quantitative version of the model accounts for the fall of the aggregate output, employment and investment, decline of credit to GDP ratio and asymmetric employment dynamics of different groups of firms observed in the US data in recessions. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1243&r=mac |
| By: | Hyeongwoo Kim; Wen Shi; Kwang-Myoung Hwang |
| Abstract: | We study the Bank of Korea’s interest rate setting behavior using an array of constrained ordered choices models, where the Monetary Policy Committee revises the target policy interest rate only when the current market interest rate deviates from the optimal rate by more than certain threshold values. Our models explain changes in the monetary policy stance well for the monthly frequency Korean data since January 2000. We find important roles for the output gap and the foreign exchange rate in understanding the Bank of Korea’s rate decision-making process. We also implement out-of-sample forecast exercises with September 2008 (Lehman Brothers Bankruptcy) for a split point. We demonstrate that out-of-sample predictability improves greatly for the rate cut and the rate hike decisions using standard error adjusted inaction bands. |
| Keywords: | Monetary Policy; Bank of Korea; Probit Model; Robit Model; Logit Model; Target RP Rate; Interbank Call Rate; Taylor Rule |
| JEL: | C51 C52 E52 E58 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2015-17&r=mac |
| By: | Boris B. Demeshev (National Research University Higher School of Economics); Oxana A. Malakhovskaya (National Research University Higher School of Economics) |
| Abstract: | This paper evaluates the forecast performance of Bayesian vector autoregressions (BVARs) on Russian data. We estimate BVARs of different sizes and compare the accuracy of their out-ofsample forecasts with those obtained with unrestricted vector autoregressions and random walk with drift. We show that many Russian macroeconomic indicators can be forecast by BVARs more accurately than by competing models. However, contrary to several other studies, we do not confirm that the relative forecast error monotonically decreases with increasing the crosssectional dimension of the sample. In half of those cases where a BVAR appears to be the most accurate model, a small-dimensional BVAR outperforms its high-dimensional counterpart. |
| Keywords: | VAR, BVAR, forecasting, Bayesian estimation |
| JEL: | C11 C13 C53 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:105/ec/2015&r=mac |
| By: | Gabriel Ehrlich; Jeffrey Perry |
| Abstract: | In 2012, the Federal Housing Administration (FHA) reduced fees to refinance FHA-insured mortgages obtained before---but not after---a retroactive deadline. We use a natural experiment to study how reduced mortgage payments affect default rates. Using a regression discontinuity design, we find that reducing payment size by 1 percent lowers conditional default rates by 2.75 percent. Evidence suggests that those effects are larger for borrowers with negative equity and lower credit scores. We estimate that the policy will prevent more than 35,000 defaults of FHA-insured mortgages, saving FHA |
| JEL: | G18 G21 E65 H50 |
| Date: | 2015–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbo:wpaper:50871&r=mac |
| By: | Sanjay Singh (Brown University); Gauti Eggertsson (Brown University) |
| Abstract: | This paper shows closed form solutions for the non-linear Calvo model at the zero bond under the assumption that uncertainty is given by a two state Markov chain with an absorbing state. This allows us to explicitly compare the solution of the non-linear model to the better known log-linearized version. In line with the log-linear model, we confirm in the non-linear setting i) large drops in output as shocks become more persistent until bifurcation occurs, ii) large government spending multipliers that have to be above 1 and iii) the paradox of toil. These results are in contrast with some recent literature on non-linearities at the ZLB. Mostly this is because that literature assumes particular form of Rotemberg prices which leads to "implausible" large cost of price adjustment in a way we make precise. Overall the non-linear Calvo model behaves similarly as its linearized counterpart both qualitatively and quantitatively with some important caveats we document. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1204&r=mac |
| By: | Nicola Viegi |
| Abstract: | This paper analyses the influence of the South African labour market on the conduct of monetary policy. Because of the weak response of wages to changes in employment, the South African Reserve Bank is confronted by an unfavourable short run unemployment-inflation trade off that complicates the implementation of the inflation targeting framework. First we provide some reduced form evidence by estimating a form of the traditional wage Phillips curve, showing the weak relationship between wage dynamics and unemployment in South Africa. We then confirm this result by presenting an estimation of a structural model of the South African economy and give a quantitative assessment of the constraint imposed by the labour market on monetary policy. Finally we interpret these results in a strategic framework, analysing the role that inflation targeting might play in either improving coordination, or worsening the interaction between trade unions and Central Bank objectives. |
| Date: | 2015–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6607&r=mac |
| By: | Khromov, Michael (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Vedev, Alexey (Russian Presidential Academy of National Economy and Public Administration (RANEPA)) |
| Abstract: | This paper is focused on the investigation of the model for compiling sectoral financial balances in the Russian economy in the context of the development of tools for the analysis of intersectoral financial flows. The paper is aimed at the drafting of methodological recommendations for compiling and analysis of balance of financial results as one of the element of macroanalysis method. Methodology of the research is based on the analysis of the available statistical sources and their comparison for the creation as far as it is feasible full and noncontradictory picture of the financial system of the Russian economy. |
| Keywords: | E21, E41, E51, E58, G21 |
| Date: | 2015–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:ppaper:dok3&r=mac |
| By: | Luis Eduardo Arango (Banco de la República de Colombia); Freddy Felipe Parra (Universidad de los Andes); Álvaro José Pinzón (Universidad de los Andes) |
| Abstract: | Presentamos la evolución de una decena de variables a lo largo del ciclo económico para distintas ciudades y grupos demográficos. Las fechas utilizadas para identificar las fases de recesión fueron tomadas de Alfonso et al. (2013). Se encuentra que la participación laboral aumenta en las contracciones mientras que la tasa de ocupación cae. La suma de estos dos hechos permite predecir sin ambigüedades que en las recesiones el desempleo aumenta. En particular, los cesantes, más que los aspirantes, siempre aumentan en los momentos de crisis; es decir, los despidos y la reinserción al mercado parecen ser los eventos más regulares durante los períodos de crisis. Los salarios y las horas trabajadas caen en las recesiones mientras que el subempleo por horas aumenta. La relación de asalariados a población en edad de trabajar se constituye en una variable clave para el estudio de las fases del ciclo ya que siempre se contrae durante las recesiones. Classification JEL: J0, E3. |
| Keywords: | Ciclos económicos, tasa de participación, tasa de ocupación, tasa de desempleo, salarios. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:911&r=mac |
| By: | Horváth, Bálint (Tilburg University, School of Economics and Management) |
| Abstract: | This dissertation is a collection of essays in two areas of financial stability. The first part deals with systemic risk in the banking sector. First, it asks whether countercyclical macroprudential policy tools can be an effective way of reducing cyclicality in bank lending. The main finding is that these policies can be counterproductive and may incentivize more intertwined banks, and hence, endanger financial stability. The next paper investigates, and provides some evidence of, the possibility that banks actively change their portfolios in order to<br/>influence the likelihood of joint bank failure. <br/>The second part of this dissertation studies the connection between public finance and financial stability. Chapter 4 looks into the interaction between bank capital regulation and taxation and finds that banks trade off leverage risk against portfolio risk in response to a higher corporate income tax rates. Finally, Chapter 5 analyses banks’ excessive holdings of domestic government debt as one of the sources of the interrelatedness of public finance and bank stability. Two possible explanations of banks’ home bias are tested: voluntary government<br/>bond hoarding and government induced bond buying.<br/> |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:9e6a078e-4278-4438-8d2c-cb151438e582&r=mac |
| By: | Massimo Guidolin; Alexei G. Orlov; Manuela Pedio |
| Abstract: | We study the effects of a conventional monetary expansion, quantitative easing, and of the maturity extension program on corporate bond yields using impulse response functions to shocks obtained from flexible models with regimes. We construct weekly bond portfolios sorting individual bond trades by rating and maturity from TRACE. A standard single-state VAR model is inadequate to capture the dynamics of the data. On the contrary, under a three-state Markov switching model with time-homogeneous VAR coefficients, we find that unconventional policies may have been generally expected to decrease corporate yields. However, even though the sign of the responses is the one expected by policy-makers, the size of the estimated effects depends on the assumptions regarding the decline in long-term Treasury yields caused by unconventional policies, on which considerable uncertainty remains. Keywords: Unconventional monetary policy, corporate bonds, term structure of Treasury yields, impulse response function, Markov swit ching vector autoregression. JEL codes: G12, E43, C32. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:562&r=mac |
| By: | Vafa Anvari; Neléne Ehlers; Rudi Steinbach |
| Abstract: | The impact of the global financial crisis on estimates of potential output, and specifically the usefulness of accounting for financial effects in the estimation process, deserves special consideration. In this paper possible paths that potential output may follow after the financial crisis are discussed and a finance-neutral potential output measure is proposed. This approach incorporates information from financial indicators in the cycle of economic activity and it is shown that when financial shocks are controlled for, the level of potential output is lower in the build-up to the financial crisis and thereafter. When compared to other frequently used methods to estimate potential output, this approach appears to deliver more reliable estimates of the output gap, particularly in real-time. |
| Date: | 2014–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:6504&r=mac |
| By: | John H. Cochrane |
| Abstract: | This paper proposes a new structure for U.S. Federal debt. It argues that all debt should be perpetual, paying coupons forever with no principal payment. The paper introduces six financing options and argues for their creation in order to protect against future fiscal or monetary shocks. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:15108&r=mac |
| By: | Rishabh Kumar (Department of Economics, New School for Social Research) |
| Abstract: | This paper proposes that high savings out of top incomes con- tributed to the steady wealth income ratio amongst US households. I explore counter claims regarding capital gains and housing prices and nd they had very little in uences on the trends and magnitudes of household net worth, relative to income. Using the dynamics of inter-group accumulation rates, I propose an accounting decomposi- tion formula which captures savings rates for any reference group. This methodology is applied to data from national accounts, balance sheets and income distribution statistics in order to compute saving rates for the Top 1% of households in the US income distribution. The estimates support the idea that high savings from top incomes have captured a growing share of wealth between 1980 and 2010. |
| Keywords: | Saving rates, Top incomes, Wealth, National Accounts |
| JEL: | D3 E21 O51 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1524&r=mac |
| By: | Buca, Andra; Vermeulen, Philip |
| Abstract: | We use the recent financial crisis period to analyse the effect of bank credit tightening on real firm investment. We derive a new set of credit tightening indexes from the ECB Bank Lending Survey. Combining these with annual balance sheet data from Germany, France, Italy, Spain, Belgium and Portugal, we exploit the heterogeneity in the dependence on bank finance of different industries to identify real effects of credit tightening. We show that in response to tightening, investment falls substantially more in bank-dependent industries. JEL Classification: E22, E44, G01 |
| Keywords: | corporate investment, credit crunch, financial crisis |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151859&r=mac |
| By: | Izu, Akhenaton; Motanda, Verlin |
| Abstract: | The carrying out of this paper came from the main problem which consists to demonstrate that the government instability, in duration and size, is a gravity for the economic growth and DRC development. Theoretically, the government instability goes through “the delay effect and the breaking effect” in order to affect the economic growth. Concerning the methodology, this paper has used an econometric approach and precisely instrumental variables method. It results from this analysis that to each cabinet reshuffle, DRC sees its economic growth decreased of 0.98%, the added value in percentage of GDP decreases of 0.19%, while public revenues are sharply up to a limit of 350 million dollars. Nevertheless, a positive relationship was detected between the average duration of a government, net foreign direct investment in percentage of GDP and the industry added value. |
| Keywords: | Government instability, Investment, Instrumental variables, Risk |
| JEL: | C26 D81 E22 H10 |
| Date: | 2015–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67802&r=mac |
| By: | David Rappoport (Federal Reserve Board); Alexandros Vardoulakis (Board of Governors of the Federal Reserve System); David Arseneau (Federal Reserve Board) |
| Abstract: | We present a model to study the feedback loop between secondary market liquidity and firm's financing decisions in primary markets. The model features two key frictions: a costly state verification problem in primary markets, and search frictions in over-the-counter secondary markets. Our liquidity concept depends on the endogenous holdings of assets put for sale relative to the resources available for buying illiquid assets. This creates a feedback loop as issuance in primary markets affects secondary market liquidity, and vice versa through liquidity premia. We show that the privately optimal allocations are inefficient. Both investors and firms can be made better off if firms take on lower leverage and less risk, and investors provide more liquidity. These inefficiencies are established analytically through a set of wedge expressions for key efficiency margins. Our analysis provides a rationale for the effect of quantitative easing on secondary and primary capital markets and the real economy. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1274&r=mac |
| By: | Matteo Cacciatore (HEC Montreal); Giuseppe Fiori (North Carolina State University) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:14-313&r=mac |
| By: | Georges Prat |
| Abstract: | The « permanent » unemployment concept of Rueff (1925, 1931) represents a classical form of unemployment due to wage rigidities leading to an excess of real wages compared to their theoretical value corresponding to a competitive equilibrium. Relative to this known aspect of the Rueff’s work, this paper shows that the author considered also a “temporary” unemployment due to an insufficient level of the economic activity, and a « minimum » frictional unemployment prevailing in the normal functioning of any economy. Using empirical data in England during the 1920’s, Rueff suggested that the « permanent » component was the main explanation of the unemployment (this is the socalled « law of Rueff »). We conduct simple econometric tests using Rueff’s data that confirm this conclusion, and we show that releasing the assumption of a constant labor productivity (supposed by Rueff) improves the « law of Rueff ». In line with these results, we show that the theoretical approach proposed by Allais (1943) joins the three types of unemployment pointed out by Rueff, renamed as “chronic”, “conjonctural” and “technological”, respectively. Much later, Allais (1980) proposed an unrecognized straightforward econometrical equation comprising these three types of unemployment to represent the french unemployment over the period 1952-78. We confirm that this equation describes a large part of the evolution of unemployment in England during the 1920’s and in France during the period 1970-2008, although the properties of residuals show that this equation is misspecified. Finally, we suggest that, under some restrictive conditions, the three types of unemployment distinguished by Rueff and Allais can be seen from the perspective of the equilibrium unemployment defined by the imperfect competition WS-PS model (Layard-Nickel-Jackman (1991)), hence allowing to indicate how the Allais’ equation is misspecified, thus highlighting the important scientific advances that have been made since. |
| Keywords: | equilibrium unemployment, wage rigidities, Maurice Allais, Jacques Rueff |
| JEL: | E24 J2 N34 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2015-30&r=mac |
| By: | Hertrich, Markus |
| Abstract: | During the recent financial crisis that erupted in mid-2007, credit default swap spreads increased by several hundred basis points, accompanied by a liquidity shortage in the U.S. financial sector. This period has both evidenced the importance that liquidity has for investors and underlined the need to understand the linkages between credit markets and liquidity. This paper sheds light on the dynamic interactions between credit and liquidity risk in the credit Default swap market. Contrary to the common belief that illiquidity leads to a credit risk deterioration in financial markets, it is found that in a sample of German and Swiss companies, credit risk is more likely to be weakly endogenous for liquidity risk than vice versa. The results suggest that a negative credit shock typically leads to a subsequent liquidity shortage in the credit default swap market, in the spirit of, for instance, the liquidity spiral posited by Brunnermaier (2009), and extends our knowledge about how credit markets work, as it helps to explain the amplification mechanisms that severely aggravated the recent crisis and also indicates which macro-prudential policies would be suitable for preventing a similar financial crisis in the future. |
| Keywords: | financial crisis, credit default swap, credit risk, liquidity risk, endogeneity, macroprudential policy |
| JEL: | E37 E61 G14 G32 G38 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67837&r=mac |
| By: | Katarina Borovickova (New York University); Jaroslav Borovicka (New York University) |
| Abstract: | Discount rates and employment fluctuations |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1273&r=mac |