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on Macroeconomics |
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Issue of 2020‒04‒27
111 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | De Koning, Kees |
| Abstract: | In the U.K., at the time of writing, the corona virus pandemic has not reached its peak yet. Once it has, hopefully in the next couple of weeks or months, the recovery process can begin. With a nearly total lock down in place on many economic activities, the future for incomes, business survivals and the wealth of the U.K’s citizens has and will come under a severe strain. The U.K. government has promised a “Whatever it takes” cash injection into the economy. The real question is about a delivery on time and in the right format. Just as an indication: the Footsie 100 stock index reached its peak this year at just over 7600 by the 17th January. Just about two months later, by the 19th March, the index had dropped to just under 5200; a drop of 31.6% in values in just over 8 weeks. Another indicator, published by the Office for National Statistics (ONS) was the unemployment rate, seasonally adjusted for all 16 years and over. Over the period November 2019-January 2020 the unemployment rate reached a near long term low of 3.9%. One has to go all the way back to the same period in 1974 to find such a low unemployment rate. The corona virus crisis has and will change all this. The Center for Economics and Business Research (CEBR) was quoted in a number of U.K. newspapers as indicating that the average home values will drop by £30,000 by the end of 2020; equivalent to 13% of such average values. The Royal Institute of Charted Surveyors in its monthly report indicated that for the next three months housing transactions have slumped to their lowest level on record, How can the U.K. economy be rebuilt? The answer may be in a wealth factor incorporated in the homes, owned and occupied by British households. The ONS publishes a bi-annual overview of such wealth factors; its latest report covers the period April 2016-March 2018. By March 2018 the owner occupiers’ net worth was £5.1 trillion and the gross figure £6.26 trillion, which included the outstanding mortgage debt of £1.16 trillion. With the U.K’s 2019 GDP at £ 2.21 trillion, the net savings built up in U.K. homes of £5.1 trillion may well come to the rescue. A new Home Equity Release Method (U.K.HERM} may be needed! |
| Keywords: | Home equity release method; corona virus economic effects; collective net U.K housing stock values; recession; |
| JEL: | D1 D14 E2 E21 E24 E3 E5 E58 G2 G21 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99683&r=all |
| By: | Nizam, Ahmed Mehedi |
| Abstract: | Here we argue that due to the difference between real GDP growth rate and nominal deposit rate, a demand pull inflation is induced into the economy. On the other hand, due to the difference between real GDP growth rate and nominal lending rate, a cost push inflation is created. We compare the performance of our proposed model to the Fisherian one by using Toda and Yamamoto approach of testing Granger Causality in the context of non-stationary data. We then use ARDL Bounds Testing approach to cross-check the results obtained from T-Y approach. |
| Keywords: | banking; interest rate; deposit rate; lending rate; demand pull inflation; cost push inflation; |
| JEL: | E31 E43 E44 E52 E58 |
| Date: | 2020–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99427&r=all |
| By: | Paula Triviño Gaviria; Santiago Castaño; Manuel Rubio García |
| Abstract: | En el contexto de la profunda crisis en términos de intercambio, déficit fiscal, déficit en cuenta corriente que enfrenta Colombia, se ha venido propagando la pandemia del coronavirus (COVID-19). Esto ha complicado el escenario de gestión de la política pública y económica. Sin embargo, es un escenario propicio para plantear medidas de política alternativas, lo cual supone salirse del canon tradicional y, aún, superar los acuerdos institucionales que le subyacen. Así las cosas, este documento busca presentar una nueva visión para resolver problemas en lo inmediato y una invitación para evaluar y pensar las políticas públicas en el futuro. |
| Keywords: | Renta básica, Transferencias, Políticas públicas, Precios, COVID-19 |
| JEL: | E23 E31 E62 E64 E52 E51 E26 |
| Date: | 2020–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:col:000430:018077&r=all |
| By: | David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics) |
| Abstract: | If the Federal Reserve does not decisively change the way it conducts monetary policy, it will probably not be capable of fighting recessions in the future as effectively as it fought them in the past. This reality helped motivate the Fed to undertake the policy framework review in which it is currently engaged. Researchers have suggested many steps the Fed could take to improve its recession-fighting ability; however, no consensus has emerged as to which of these steps would be both practical and maximally effective. This paper aims to fill that gap. It recommends that the Fed commit as soon as possible to a new approach for fighting recessions, involving two key elements. First, the Fed should commit that whenever it runs out of room to cut the federal funds rate further, it will leave the rate at its minimum level until the labor market recovers and inflation returns to 2 percent. Second, the Fed should commit that under the same circumstances, it will begin to purchase longer-term assets in volume and will continue such purchases until the labor market recovers. If the forces driving the next recession are not unusually severe, this framework might allow the Fed to be as effective at fighting that recession as it was in the past. If the next recession is more severe, however, the Fed will probably run out of ammunition even if it takes the two steps recommended here. Therefore, both monetary and fiscal policymakers should consider yet other steps they could take to enhance their ability to fight future recessions. |
| Keywords: | Monetary policy, Federal Reserve, framework review, effective lower bound |
| JEL: | E43 E44 E52 E58 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp20-15&r=all |
| By: | Òscar Jordà; Moritz Schularick; Alan M. Taylor |
| Abstract: | Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini “disasters”. By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and transparent mapping from the estimates to the calibrated simulation model. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. In postwar America, households would sacrifice more than 10 percent of consumption to avoid such cyclical fluctuations. |
| Keywords: | local projections; macroprudential policy.; fluctuations; random coefficients; asymmetry |
| JEL: | E13 E21 E22 E32 |
| Date: | 2020–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:87712&r=all |
| By: | Òscar Jordà; Moritz Schularick; Alan M. Taylor |
| Abstract: | Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini “disasters”. By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and transparent mapping from the estimates to the calibrated simulation model. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. In postwar America, households would sacrifice more than 10 percent of consumption to avoid such cyclical fluctuations. |
| JEL: | E13 E21 E22 E32 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26962&r=all |
| By: | Gupta, Rangan (Department of Economics, University of Pretoria); Ma, Jun (Department of Economics, Northeastern University); Theodoridis, Konstantinos (Cardiff Business School); Wohar, Mark E (College of Business Administration, University of Nebraska at Omaha) |
| Abstract: | We use a time-varying parameter dynamic factor model with stochastic volatility (DFM-TV-SV) estimated using Bayesian methods to disentangle the relative importance of the common component in FHFA house price movements from state-specific shocks, over the quarterly period of 1975Q2 to 2017Q4. We find that the contribution of the national factor in explaining fluctuations in house prices is not only critical, but also has been increasing and has become more important than the local factors since around 1990. We then use a Bayesian change-point vector autoregressive (VAR) model, that allows for different regimes throughout the sample period, to study the impact of aggregate supply, aggregate demand, (conventional) monetary policy, and term-spread shocks, identified based on sign-restrictions, on the national component of house price movements. We detect three regimes corresponding to the periods of ÒGreat InflationÓ, ÒGreat ModerationÓ, and the zero-lower bound (ZLB). While the conventional monetary policy is found to have played an important role in the historical evolution of the national factor in the first-regime, other shocks are found to be quite dominant as well especially during the second regime, with monetary policy shocks playing virtually no role during this period. In the third-regime, unconventional monetary policy shock is found to have led to a (delayed) recovery in the housing market. But more importantly, we find evidence that the national housing factor has been detached from the identified macroeconomic shocks (fundamentals) since 2014, thus suggesting that a Ònational bubbleÓ might be brewing again in the US housing market. Understandably, our results have important policy implications. |
| Keywords: | House Prices, Time-Varying Dynamic Factor Model, Change-Point Vector Autoregressive Model, Macroeconomic Shocks, Bayesian Analysis |
| JEL: | C11 C32 E31 E32 E43 E52 R31 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2020/3&r=all |
| By: | Hashmat Khan (Department of Economics, Carleton University); Louis Phaneuf (Université du Québec à Montréal); Jean-Gardy Victor (Université du Québec à Montréal) |
| Abstract: | We offer a tale of two major postwar business cycle episodes: the pre-1980s and the post-1982s prior to the Great Recession. We revisit the sources of business cycles and the reasons for the large variations in aggregate volatility from the first to the second episode. Using a medium-scale DSGE model where monetary policy potentially has cost-channel effects, we first show the Fed most likely targeted deviations of output growth from trend growth, not the output gap, for measure of economic activity. When estimating our model with a policy rule reacting to output growth with Bayesian techniques, we find the US economy was in a state of determinacy prior to 1980 and after 1982. Thus, aggregate instability before 1980 did not result from self-fulfilling changes in inflation expectations. Our evidence shows the Fed reacted more strongly to inflation after 1982. Based on sub-period estimates, we find that shocks to the marginal efficiency of investment largely drove the cyclical variance of output growth prior to 1980 (61%), while they have seen their importance falls dramatically after 1982 (19%). When looking at the sources of greater macroeconomic stability during the second episode, we find no strong support for the “good-luck hypothesis†. Change in nominal wage flexibility largely drove the decline in output growth volatility, while change in monetary policy was a key factor driving lower inflation variability. |
| Keywords: | Conventional Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility |
| JEL: | E31 E32 E37 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:20-03&r=all |
| By: | Bing Tong (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan) |
| Abstract: | Capacity reduction has been a recurrent theme in China’s economic policy. This paper proves in a New Keynesian model that the effects of the decapacity policy depend on its persistence and monetary policy regime (interest rate flexibility). Under an interest rate peg, a temporary policy is ineffective and even expansionary, whereas a permanent policy is effective due to a negative wealth effect. When the nominal interest rate is pegged, the real rate moves oppositely with inflation, which adds positive feedback to the economy. Thus the de-capacity policy has greater uncertainty under the interest rate peg. As a policy tool, it may easily deviate from its target and bring about excessive volatility. Last, long-run price stability and a gradually advanced de-capacity policy are helpful to the achievement of policy targets. |
| Keywords: | Chinese economy, Capacity reduction, De-capacity, New Keynesian Model, Supply shock, Interest rate peg |
| JEL: | E12 E31 E42 E43 E52 E61 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:202002&r=all |
| By: | Al-Ubaydli, Omar |
| Abstract: | The coronavirus is causing considerable damage to the global economy, and the potential damage is continuing to grow. Unlike many other crises, evaluating the economic impact of the coronavirus is extremely challenging, due to the complexity of the ways in which it affects economic activity. This paper explains the main channels that economists think about when attempting to gauge the virus’s economic fallout, and then presents some of the most recent assessments being circulated in the research community. It is written in a manner that is accessible to non-economists, while still making use of the cutting-edge contributions made in the academic literature. |
| Keywords: | coronavirus; global economy |
| JEL: | E5 E52 E58 E6 E62 E63 F1 I18 |
| Date: | 2020–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99642&r=all |
| By: | Kristin J. Forbes (MIT Sloan School of Management); Joseph E. Gagnon (Peterson Institute for International Economics); Christopher G. Collins (Peterson Institute for International Economics) |
| Abstract: | This paper models inflation by combining the multicountry framework of one of its authors (Forbes) with the nonlinear specification proposed by the other two (Gagnon and Collins). The results find strong support for a Phillips curve that becomes nonlinear when inflation is low, in which case excess economic slack has little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. The estimates also show a significant and economically meaningful Phillips curve relationship between slack and inflation when slack is negative (i.e., when output is above long-run potential). In this nonlinear model, international factors play a large role in explaining headline inflation, a role that has increased over time, supporting the results of Forbes’ linear model. |
| Keywords: | Economic slack, globalization, output gap, price dynamics |
| JEL: | E31 E37 E52 E58 F62 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp20-6&r=all |
| By: | Jongrim Ha (World Bank); M. Marc Stocker (World Bank); Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | This paper investigates exchange rate pass-through into consumer prices by considering the nature of the shock triggering currency movements. By individually estimating structural factor-augmented vector autoregression models for 55 countries, monetary policy shocks are shown to be associated with higher exchange rate pass-through measures compared to other domestic shocks, while global shocks have widely different effects across countries. Pass-through measures tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets, where central bank independence can greatly facilitate the task of stabilizing inflation by using the exchange rate as a buffer against external shocks. It is implied that exchange rate pass-through should be investigated by considering the nature of the shock that triggers currency movements and country characteristics that affect the response of prices. |
| Keywords: | Inflation, Foreign Exchange, Monetary Policy, Exchange Rate Pass Through |
| JEL: | E31 E42 E52 F31 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:2004&r=all |
| By: | Pierre Aldama (Banque de France and Sciences Po, OFCE); Jérôme Creel (Sciences Po, OFCE and ESCP) |
| Abstract: | This paper presents empirical evidence of asymmetric fiscal policy along the business cycle, using a real-time panel data on 19 OECD countries. We estimate various specifications of fiscal policy rules, in which ex ante fiscal policy has two major objectives: macroeconomic stabilization and fiscal consolidation. First, we find that a symmetric fiscal policy rule may not be an accurate representation of real-time fiscal policy. We find evidence in favor of asymmetric fiscal policy, in particular regarding the response to output gap. Second, fiscal policy appears to be generally procyclical in downturns and a-cyclical in upturns, typically in the Euro Area and during the crisis. Third, we do not find significant evidence of a procyclical fiscal consolidation in the OECD and the Euro Area, although surplus-debt feedback coefficients are generally larger in downturns. Our results are robust to an alternative measure of business cycle and to country exclusion. |
| Keywords: | Fiscal policy rules, real-time data, asymmetric stabilization, fiscal consolidation |
| JEL: | E61 E62 H6 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:2009&r=all |
| By: | Julia Coronado (Macropolicy Perspectives); Simon Potter (Peterson Institute for International Economics) |
| Abstract: | In the second part of their Policy Brief, Coronado and Potter discuss how the system of digital payment providers (DPPs) proposed in their first Policy Brief on this topic adds a new weapon to the monetary toolkit that could be implemented in a timely, effective, and inclusive manner. They describe how a digital currency backed by the Federal Reserve could augment automatic fiscal stabilizers and—more importantly—harness the power of “helicopter†money or quantitative easing directly to consumers in a disciplined manner. To implement QE directly to consumers, Coronado and Potter propose the creation of recession insurance bonds (RIBs)—zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn. Congress would create these contingent securities; Treasury would credit households’ digital accounts with them. The Fed could purchase them from households in a downturn after its policy rate hits zero. The Fed’s balance sheet would grow by the value of RIBs purchased; the initial matching liability would be deposits into the DPP system. The mechanism is easy for consumers to understand and could boost inflation expectations more than a debt-financed fiscal stimulus could. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb20-5&r=all |
| By: | Ekundayo P. Mesagan (Pan Atlantic University, Lekki, Lagos, Nigeria); Ismaila A. Yusuf (University of Strathclyde, Glasgow, Scotland) |
| Abstract: | The study examines the impact of fiscal and monetary policy on economic performance and stabilisation in Nigeria, Gambia, and Ghana between 1980 and 2017. In the study, the real gross domestic product and the exchange rate are used to proxy economic performance and economic stabilisation respectively while fiscal policy is captured with deficit finance and government expenditure. Also, the broad money supply and monetary policy rate are used as proxies of monetary policy. The study obtains country-specific results using the fully modified ordinary least squares technique and findings show that monetary policy has insignificant effect on economic performance in Nigeria and the Gambia, but has significant impact in Ghana while fiscal policy significantly enhances economic performance in Nigeria and Gambia, but is insignificant in Ghana. Result also confirms that monetary policy significantly drives economic stabilisation in Nigeria and the Gambia, but insignificantly in Ghana while fiscal policy has insignificant impact on economic stabilisation in Ghana and Gambia, but significant in Nigeria. Thus, we conclude that fiscal policy is relatively more important in stimulating economic performance in Nigeria and Gambia while monetary policy is relatively more important in determining economic performance in Ghana. For economic stabilisation, both fiscal and monetary policies are important in Nigeria, both are ineffective in Ghana, while monetary policy is more important in the Gambia. The study recommends further reductions in monetary policy rate to put less pressure on the exchange rate and stabilise the various economies. |
| Keywords: | Fiscal Policy; Monetary Policy; Deficit Finance; Economic Performance |
| JEL: | E52 E62 E63 H62 F31 F43 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:19/097&r=all |
| By: | Dreger, Christian; Gerdesmeier, Dieter; Roffia, Barbara |
| Abstract: | The critical role of house prices for macroeconomic and financial stability is widely acknowl-edged since the global financial crisis. While house prices showed spectacular increases and even a bubble-like behaviour in the pre-crisis years, their fall thereafter was accompanied by deep recessions in many countries. Loose monetary conditions, such as the easy availability of credit, are often blamed to be fuelling such booms. In this paper, the link between credit and house prices is investigated for the euro area in a nonlinear model framework. This choice is motivated by the idea that the linkages between these two variables can be governed by a regime-switching behaviour. Threshold VAR (TVAR) models are estimated, which comprise real house price and credit developments, business and monetary conditions. Optimal breakpoints are determined via a grid search. The relationship between the variables is not stable. If output growth and interest rate changes serve as thresholds, two regimes can be distinguished. Conversely, if house prices and credit control the regime change, three regimes are more appropriate. Nonlinear impulse responses suggest that credit developments respond to house prices, while the reverse causality is less significant. Thus, the modest recovery of credit at the current edge can only be partially attributed to the recent acceleration of house prices in the euro area. |
| Keywords: | Threshold models, house prices and credit, regime switching |
| JEL: | C34 E31 E52 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99523&r=all |
| By: | Olsson, Kerstin (Department of Economics) |
| Abstract: | This paper examines the effects of policy rate announcements on households' inflation expectations over the time period 2003-2015. The effect is estimated using a two-stage least squares regression model. The announced changes are instrumented by a monetary policy surprise variable obtained from high-frequency swap trade data. The effect of an announced increase in the policy rate on inflation expectations is significant and positive. According to the New-Keynesian model, the effect of an exogenous monetary policy shock depends on the assumptions made on the persistence of the shock process in the model. Alternatively, the results may be interpreted as the policy announcement signalling the central bank's private information on the direction of future inflation. Given the sizeable weight of housing costs in the Swedish CPI basket, the results may also be interpreted as reflecting the direct effect of interest rates on the CPI. In this case, households internalize the effects of interest rates on CPI, when forming expectations about the future rate of inflation. |
| Keywords: | Monetary policy; Inflationary expectations; Instrumental Variables; Event studies |
| JEL: | C26 E31 E52 G14 |
| Date: | 2020–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2020_002&r=all |
| By: | Dumitriu, Ramona; Stefanescu, Răzvan |
| Abstract: | The recent coronavirus disease 2019 (COVID-19) generated some non-routine problems, characterized by a high degree of uncertainty which makes difficult the solving by the full rational decision making models. In the field of finance, such problems are those associated to the fiscal and monetary policies, that have to fight the recession or to investments in the presence of turbulences on the financial markets. Regarding the fiscal and monetary policies, governments and central banks could be tempted to use the same strategies that were successful in mitigating the effects of the Great Recession from 2007 – 2008, although the recent recession has different causes. In some developed countries there were launched stimulus packages, which allocated impressive financial resources to the economic branches affected by COVID-19. However, as in the case of Great Recession, the complexity of the circumstances made very hard an objective assignment of these resources. For the European Union, a particularity of the strategic solutions to the recent crisis is the fact that many of them are adopted by group decisions, where various interests of the participants have to be conciliated. In many countries, the fall of GDP, the rise of budget deficits and the present low interest rates could impose the choice between a high unemployment and an accelerating inflation. In such decisions, the objectives of governments, usually, very sensitive to the unemployment evolution, could compete with those of the central banks preoccupied by the prices stability. An accelerating inflation could shock the populations from many developed countries which, in the recent past, got used to a comfortable monetary stability. It could also undermine the central banks credibility, leading to distrust in the national currencies. In such situations, the inflation expectations would be no longer a tool for the monetary policies, but an obstacle for their objectives. They could also increase the uncertainty for some financial decisions, modifying the behaviors of various categories of investors, creditors of debtors. In the first quarter of 2020, the news about the COVID-19’s propagation and about the measures meant to help the economies provoked an unusual large number of negative and positive shocks on the developed and emerging capital markets. Such turbulences could be viewed as symptoms of overreactions which occur often in the times of crisis. It is possible, although not easy to prove, that the concern for their own health changed the behavior of some investors. The increased volatility could intimidate many risk-averse investors, but it could also attract some investors who use to take high risks. In some countries, the national currencies depreciated and the volatility of the exchange rates increased. As it happened before in other turbulent times, the gold became an attractive asset for investors. The potential boundaries of the rationality induced by COVID-19 in some decisions such as those regarding fiscal and monetary policies or investments are, somehow, new for the field of the finance. They could be viewed as challenges for the Behavioral Finance which studies the causes of irationality in the financial decision making. However, in the present days, when it is very hard to estimate for how long the COVID-19 pandemic will last, it is also very difficult to predict if such situation would lead to new approaches in the field of the Behavioral Finance. |
| Keywords: | Rationality of the decisions, Financial behavior, COVID-19 |
| JEL: | E50 G01 G02 G10 G14 G15 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99675&r=all |
| By: | Alexander Dietrich; Keith Kuester; Gernot J. Muller; Raphael Schoenle |
| Abstract: | We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper we feed the survey data into a New Keynesian business cycle model. Because the economic costs of the pandemic have not fully materialized yet but are nonetheless (a) anticipated and (b) uncertain, private expenditure collapses, thereby amplifying and bringing forward in time the economic costs of the pandemic. The short-run economic impact of the pandemic depends critically on whether monetary policy accommodates the drop in the natural rate of interest or not. |
| Keywords: | corona; zero lower bound; uncertainty; news shocks; COVID-19; monetary policy; household expectations; natural rate; survey |
| JEL: | C83 E43 E52 |
| Date: | 2020–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:87736&r=all |
| By: | Julia Coronado (Macropolicy Perspectives); Simon Potter (Peterson Institute for International Economics) |
| Abstract: | The US monetary system faces significant challenges from advances in technology and changes in the macroeconomy that, left unaddressed, will threaten the stability of the US economy and financial system. At the same time, low interest rates mean that central banks will not have the policy ammunition they had in the past during the next recession. The Federal Reserve needs new tools to meet its mandates of price stability and maximum employment. It also needs to preserve the safety and soundness of the financial system in a rapidly digitizing world. The authors propose a Fed-backed digital currency to solve both problems. Their proposal creates a regulated system of digital currency accounts for consumers managed by digital payment providers and fully backed by reserves at the Fed. The system would be limited in size, to preserve the functions and stability of the existing banking system. Fed backing would mean low capital requirements, which would in turn facilitate competition. Low fees and no minimum balance requirements in the new system would also help financial institutions reach the roughly 25 percent of the US population that is currently either unbanked or underbanked. Digital accounts for consumers could also provide a powerful new stabilization tool for both monetary and fiscal policies. For fiscal policy, it could facilitate new automatic stabilizers while also allowing the Fed to provide quantitative easing directly to consumers. This tool could be used in a timely manner with broad reach to all Americans. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb20-4&r=all |
| By: | James Cloyne; Òscar Jordà; Alan M. Taylor |
| Abstract: | Unusual circumstances often coincide with unusual fiscal policy actions. Much attention has been paid to estimates of how fiscal policy affects the macroeconomy, but these are typically average treatment effects. In practice, the fiscal “multiplier” at any point in time depends on the monetary policy response. Using the IMF fiscal consolidations dataset for identification and a new decomposition-based approach, we show how to evaluate these monetary-fiscal effects. In the data, the fiscal multiplier varies considerably with monetary policy: it can be zero, or as large as 2 depending on the monetary offset. We show how to decompose the typical macro impulse response function into (1) the direct effect of the intervention on the outcome; (2) the indirect effect due to changes in how other covariates affect the outcome when there is an intervention; and (3) a composition effect due to differences in covariates between treated and control subpopulations. This Blinder-Oaxaca-type decomposition provides convenient way to evaluate the effects of policy, state-dependence, and balance conditions for identification. |
| Keywords: | state-dependence; identification; fiscal policy; interest rates; Blinder-Oaxaca decomposition; balance; local projections |
| JEL: | H20 E32 C54 E62 H5 N10 C99 |
| Date: | 2020–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:87713&r=all |
| By: | Francesco Bogliacino; Sandra Rojas Berrio; Daniel Castellanos G; Julio Cesar Chamorro; David F Forero; Mauricio Gómez Villegas; Andrea del Pilar González Peña; Gustavo Junca |
| Abstract: | A partir del 21 de noviembre 2019 (#21N) en Colombia se ha abierto un ciclo de movilizaciones y protestas sin precedentes en la historia del país. En las múltiples instancias de discusión y asambleas, uno de los llamados de movimientos y organizaciones ha sido dirigido hacia la Academia para que aporte con análisis y propuestas. Desde la Dirección del CID se ha considerado importante involucrar docentes e investigadores para que respondan a ese llamado. Este documento es el resultado de este esfuerzo. Como siempre, los autores tenían completa libertad de enfoque y posición teórica. |
| Keywords: | Paro; Pensiones; Instituciones; Tierra; Ambiente; Pensamiento Feminista; Holding; Financiarización; Líderes Sociales; Género |
| JEL: | B52 B54 D02 D20 D30 D63 E12 E24 E62 E69 G15 G23 G28 H10 H11 H20 H50 H82 I00 J26 J30 O43 O54 |
| Date: | 2020–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000426:018097&r=all |
| By: | Tyler Atkinson; Michael D. Plante; Alexander W. Richter; Nathaniel Throckmorton |
| Abstract: | Macroeconomic uncertainty—the conditional volatility of the unforecastable component of a future value of a time series—shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and can cause meaningful variation in uncertainty compared to the data. Estimating several variants of a nonlinear real business cycle model reveals the data strongly prefers a model with high complementarity between capital and labor inputs. |
| Keywords: | State-Dependent; Time-Varying Volatility; CES Production; Nonlinear Estimation |
| JEL: | C15 D81 E32 E37 |
| Date: | 2020–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:87823&r=all |
| By: | Zhang, Hanzhe (Michigan State University, Department of Economics); Hu, Yunzhi (Kenan-Flagler Business School, University of North Carolina) |
| Abstract: | How should the government effectively provide liquidity to banks during periods of financial distress? During the 2008-2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window (DW), but actively participated in its special monetary program, the TermAuction Facility (TAF), although both programs had the same borrowing requirements. Us-ing an adverse selection model with endogenous borrowing decisions, we explain why two programs suffer from different stigma and how the introduction of TAF incentivized banks’ borrowing. Empirically, we combine several data sources to confirm the theoretical prediction that weaker banks borrowed relatively more from the DW. |
| Keywords: | lending of last resort; discount window stigma; Term Auction Facility; adverse selection |
| JEL: | D44 E52 E58 G01 |
| Date: | 2020–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2020_007&r=all |
| By: | Stefan Ederer (Austrian Institute of Economic Research (AT)); Armon Rezai |
| Abstract: | We study endogenous employment and distribution dynamics in a Post-Keynesian model of Kalecki-Steindl tradition. Productivity adjustments stabilize employment and the labour share in the long run: technological change allows firms to replenish the reserve army of workers in struggle over income shares and thereby keep wage demands in check. We discuss stability conditions and the equilibrium dynamics. This allows us to study how legal working time and its reduction affect the equilibrium. We find that a demand shock is likely to lower the profit share and increase the employment rate. A supply shock in contrast tends to have detrimental effects on employment and income distribution. Labour market institutions and a working time reduction have no long-term effect on growth, distribution and inflation in the model. The effects on the level of capital stock and output however are positive in a wage-led demand regime. Furthermore, an erosion of labour market institutions dampens inflation temporarily. The model provides possible explanations as to the causes of several current economic phenomena such as secular stagnation, digitalisation, and the break-down of the Philips curve. |
| Keywords: | Post-Keynesian economics, productivity, technological change, income distribution, employment |
| JEL: | D33 E12 E24 O40 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2010&r=all |
| By: | Ekundayo P. Mesagan (Pan-Atlantic University, Lagos, Nigeria); Isaac A. Ogbuji (University of Lagos, Nigeria); Yasiru O. Alimi (University of Lagos, Nigeria); Anthonia T. Odeleye (University of Lagos, Nigeria) |
| Abstract: | This study analyses the growth effects of financial market instruments in Ghana between 1991 and 2017. We use the ARDL bounds testing approach to analyse data on real GDP per capita, monetary policy rate, treasury bill rate, stocks traded, bank credits, stock turnover, market capitalisation, foreign direct investment, and gross investment. Findings show the existence of a long-run relationship between both short- and long-term financial market indicators and economic growth. Also, results confirm that long-term financial instruments perform better than the short-term instruments in boosting the country’s economy in the short-run, while in the long-run, both short-term and long-term financial indicators positively impact economic growth in Ghana. We recommend that the bank of Ghana should consider lowering the bank rate further from the current annual rate of 16.0% to enhance bank credits, boosts domestic investment, and improve growth in the long-run. |
| Keywords: | Financial Market Instruments, Market Capitalisation, Economic Growth, ARDL Bounds Test |
| JEL: | E13 E43 E51 G20 O47 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:19/095&r=all |
| By: | S. Mahendra Dev (Indira Gandhi Institute of Development Research); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | The outbreak of the Covid-19 pandemic is an unprecedented shock to the Indian economy. The economy was already in a parlous state before Covid-19 struck. With the prolonged country-wide lockdown, global economic downturn and associated disruption of demand and supply chains, the economy is likely to face a protracted period of slowdown. The magnitude of the economic impact will depend upon the duration and severity of the health crisis, the duration of the lockdown and the manner in which the situation unfolds once the lockdown is lifted. In this paper we describe the state of the Indian economy in the pre-Covid-19 period, assess the potential impact of the shock on various segments of the economy, analyse the policies that have been announced so far by the central government and the Reserve Bank of India to ameliorate the economic shock and put forward a set of policy recommendations for specific sectors. |
| Keywords: | Covid-19, pandemic, economic downturn, aggregate demand, supply chain, informal sector, financial institutions, fiscal policy |
| JEL: | E2 E5 E6 G2 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2020-013&r=all |
| By: | Fabian Lange; Theodore Papageorgiou |
| Abstract: | Exploiting results from the literature on non-parametric identification, we make three methodological contributions to the empirical literature estimating the matching function, commonly used to map unemployment and vacancies into hires. First, we show how to non-parametrically identify the matching function. Second, we estimate the matching function allowing for unobserved matching efficacy, without imposing the usual independence assumption between matching efficiency and search on either side of the labor market. Third, we allow for multiple types of jobseekers and consider an “augmented” Beveridge curve that includes them. Our estimated elasticity of hires with respect to vacancies is procyclical and varies between 0.15 and 0.3. This is substantially lower than common estimates suggesting that a significant bias stems from the commonly-used independence assumption. Moreover, variation in match efficiency accounts for much of the decline in hires during the Great Recession. |
| JEL: | E24 E32 J63 J64 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26972&r=all |
| By: | Travis J. Berge |
| Abstract: | What is the output gap and when do we know it? A factor stochastic volatility model estimates the common component to forecasts of the output gap produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The common factor to these forecasts is highly procyclical, and unexpected increases to the common factor are associated with persistent responses in other macroeconomic variables. However, output gap estimates are very uncertain, even well after the fact. Output gap uncertainty increases around business cycle turning points. Lastly, increased macroeconomic uncertainty, as measured by the output gap's time-varying volatility, produces pronounced negative responses to other macroeconomic variables. |
| Keywords: | Output gap; Unobserved variables; Real-time data; Factor model; Stochastic volatility; Macroeconomic uncertainty |
| JEL: | C53 E32 |
| Date: | 2020–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-12&r=all |
| By: | Martin Larch; Eloise Orseau; Wouter Van Der Wielen (European Commission - JRC) |
| Abstract: | Rather than stabilising aggregate demand, discretionary fiscal policy tends to amplify cyclical fluctuations of output. The commonly accepted reasons are political economy and uncertainty. In the EU, the pro-cyclical nature of discretionary fiscal policy has also been associated with the commonly agreed fiscal rules, which, for some observers, unduly limit the scope for stabilising output. Using panel data covering close to 50 EU and non-EU countries, we provide evidence that the uncertainty around output gap estimates is not a convincing explanation for pro-cyclical policies. Discretionary measures remain ill-timed from a stabilisation perspective even when observable and politically more meaningful indicators of the cycle are used. We also show that deviations from fiscal rules and the accumulation of government debt foster pro-cyclical fiscal policy. Lawmakers can run discretionary fiscal policy measures based on political economy considerations up to a point. Once debt grows too high, they are forced to implement fiscal consolidation measures regardless of the cycle. More generally, there is no fiscal rule, which, if consistently ignored, safeguards the opportunity to stabilise output with discretionary fiscal policy measures. Complying with fiscal rules that are designed to keep a steady course in the face of cyclical fluctuation is conducive to counter-cyclical fiscal policy making. |
| Keywords: | fiscal policy, fiscal rules, fiscal stabilisation, counter-cyclical policy, dynamic panel models |
| JEL: | C23 E61 E62 H30 H60 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:taxref:202001&r=all |
| By: | Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci |
| Abstract: | We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified. |
| Keywords: | Financial Crises; Endogenous Regime-Switching; Bayesian Estimation; Business Cycles; Mexico; Occasionally Binding Constraints |
| JEL: | C11 E3 F41 G01 |
| Date: | 2020–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:87709&r=all |
| By: | Delis, Manthos |
| Abstract: | What are the policy tools in times of economic crises? What are the tools that governments and central banks have against the coronavirus crisis? This article briefly explains how several types of monetary policy can currently work, placing an emphasis on a form of helicopter money directed to affected firms. The proposition is that this type of monetary policy should be avoided in general, but it might yield beneficial results in the current European economy. |
| Keywords: | Monetary policy; Helicopter money; Unconventional tools; Government debt |
| JEL: | E5 E50 G0 G01 |
| Date: | 2020–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99548&r=all |
| By: | IANCU, AUREL (National Institute of Economic Research - Romanian Academy) |
| Abstract: | During the 20 years since the adoption of the euro by the first 11 countries and especially in the years following the crisis, the EU and the euro area have taken important legislative and economic initiatives. They aimed at: 1) achieving the sustainability of the convergence criteria; 2) taking into account the relevant additional factors; 3) ensuring the stability of public finances by activating the macroeconomic imbalances procedure; 4) improving the functioning and governance of the economy by introducing a broad framework for coordinating economic policies and the complex decision-making process (European Semester, strengthening the supervision of public finances, coordinating macroeconomic policies); 5) deepening the European integration of the financial-banking sector through the establishment and development of the banking union. These new requirements are important not only for the moment of accession to the euro area, but also for the post-accession phase for the country to cope with its new role as a member of the Economic and Monetary Union. |
| Keywords: | euro adoption, exchange rate mechanism II, euro area, sustainability of the convergence criteria, relevant additional factors, single supervisory mechanism, single resolution mechanism, banking union |
| JEL: | F02 F36 F45 E42 E61 E63 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ror:seince:200131&r=all |
| By: | Wilhelmsson, Mats (Department of Real Estate and Construction Management, Royal Institute of Technology) |
| Abstract: | The main objective is to answer the question of what role does the housing market play for the transmission mechanism and especially is the impact constant over time. The research question also includes analyzing the importance of the housing market for the transmission mechanism. We estimate an eight-variable structural vector autoregression (SVAR) model of the Swedish economy over the period 1993 and 2018, covering both the internet bubble in 2000 and the financial crises in 2008. The results indicate that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Overtime has the traditional interest rate channel importance has been stable. On the other hand, the role of the bank lending channel has increased over time. Household debt has increased substantially in Sweden and elsewhere. That means that the interest rate sensitivity in society has increased. Based on the results, it is possible to evaluate and forecast potential house price effects (both direct and indirect) when the interest rate changes. |
| Keywords: | Monetary policy; transmission mechanism; bank lending; house prices; structured VAR; Granger causality |
| JEL: | C54 E52 E63 R31 R32 |
| Date: | 2020–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:kthrec:2020_005&r=all |
| By: | Barua, Suborna |
| Abstract: | The globalization of COVID-19 pandemic and its economic impacts is set to run havoc across all economies in the world, throwing many into recession and possibly economic depression. As the numbers of infected and death cases rise sharply and recovery from the pandemic remains uncertain even in developed countries, evidence of shocks across economies including China, the Europe, and the US are already emerging. The aim of this paper is to provide an overall understanding of the likely macroeconomic shocks of the pandemic, covering economic activities or areas including demand, supply, supply chain, trade, investment, price level, exchange rates, and financial stability and risk, economic growth, and international cooperation. The paper first presents a general and theoretical mapping of the likely macroeconomic impacts of the pandemic on an affected economy and then reviews the emerging evidence in relation to the impact mapping to understand the nature of the impacts. The paper then illustrates the likely impacts using a standard macroeconomic AD-AS model and outlines some necessary features that needs to be considered while designing policy responses by governments and international institutions in mitigating the economic shocks. Assessments of this paper are broadly in line with the limited studies available on the economics of COVID-19. |
| Keywords: | COVID-19, coronavirus, coronanomics, pandemic, economic impacts |
| JEL: | E1 E6 F0 I0 |
| Date: | 2020–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99693&r=all |
| By: | Danilo Cascaldi-Garcia; Marija Vukotić |
| Abstract: | We exploit firm-level data on patent grants and subsequent reactions of stocks to identify technological news shocks. Changes in stock market valuations due to announcements of individual patent grants represent expected future increases in the technology level, which we refer to as patent-based news shocks. Our patentbased news shocks resemble diffusion news, in that they do not affect total factor productivity in the short run but induce a strong permanent effect after five years. These shocks produce positive comovement between consumption, output, investment, and hours. Unlike the existing empirical evidence, patent-based news shocks generate a positive response in inflation and the federal funds rate, in line with a standard New Keynesian model. Patenting activity in electronic and electrical equipment industries, within the manufacturing sector, and computer programming and data processing services, within the services sector, play crucial roles in driving our results. |
| Keywords: | News Shocks; Patents; Patent-based news shocks |
| JEL: | E30 E32 L60 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1277&r=all |
| By: | Tomas Konecny; Lukas Pfeifer |
| Abstract: | This paper focuses on ring-fencing in the specific context of macroprudential policy and its effects on financial integration in the EU over time. It views macroprudential ring-fencing as a restriction on the regulatory capital mobility of cross-border banking groups as a result of macroprudential measures. We find two main factors behind the observed heterogeneity of macroprudential policy with the potential for ring-fencing - credit risk materialisation and the share of foreign-owned banks' assets related to the gradual phase-in of capital reserves. The heterogeneity of risk weights should be partly limited by the new CRD V/CRR II regulatory package and other prudential backstops (such as the leverage ratio requirement and the output floor). On the other hand, the new regulatory package contains limits on structural reserves, which may lead to a situation where regulatory design precludes the application of macroprudential measures corresponding to the level of systemic risk. |
| Keywords: | Financial stability, macroprudential policy, ring-fencing |
| JEL: | E58 E61 G18 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2019/04&r=all |
| By: | Lakdawala, Aeimit (Michigan State University, Department of Economics); Moreland, Timothy (Michigan State University, Department of Economics); Schaffer, Matthew (UNC Greensboro) |
| Abstract: | An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis. |
| Keywords: | monetary policy uncertainty; international spillover; international portfolio balance; flight to safety |
| JEL: | E43 E58 G12 G15 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2020_008&r=all |
| By: | Nakata, Taisuke; Schmidt, Sebastian; Budianto, Flora |
| Abstract: | Assigning a discretionary central bank a mandate to stabilize an average inflation rate—rather than a period-by-period inflation rate—increases welfare in a New Keynesian model with an occasionally binding lower bound on nominal interest rates. Under rational expectations, the welfare-maximizing averaging window is infinitely long, which means that optimal average inflation targeting (AIT) is equivalent to price level targeting (PLT). However, AIT with a finite, but sufficiently long, averaging window can attain most of the welfare gain from PLT. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting AIT can be small. JEL Classification: E31, E52, E58, E61, E71 |
| Keywords: | deflationary bias, expectations, liquidity trap, makeup strategies, monetary policy objectives |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202394&r=all |
| By: | Garth Baughman; Stanislav Rabinovich |
| Abstract: | Firms often make production decisions before meeting a buyer. We incorporate this often-overlooked fact into an otherwise standard monetary search model and show that it has important implications for the set of equilibria, efficiency, and the cost of inflation. Our model features a strategic complementarity between the buyers' ex ante choice of money balances and sellers' ex ante choice of productive capacity. When resale value of unsold inventories is high, sellers carry excess capacity and the equilibrium is unique. But, when resale value is low, there is a continuum of equilibria, all of which are inefficient and welfare-ranked. Effects of inflation are highly nonlinear. When inflation is high, the buyer's money holdings bind, and inflation therefore reduces trade through a standard real-balance channel. When inflation is low, the seller's capacity constraint binds, real balances have no effect at the margin, and inflation has no effect on output or welfare. |
| Keywords: | Search; Money; New monetarism; Inflation |
| JEL: | D43 E31 E40 |
| Date: | 2020–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-19&r=all |
| By: | Joshua Bernstein; Alexander W. Richter; Nathaniel Throckmorton |
| Abstract: | This paper examines the response of the U.S. labor market to a large and persistent job separation rate shock, motivated by the ongoing economic effects of the COVID-19 pandemic. We use nonlinear methods to analytically and numerically characterize the responses of vacancy creation and unemployment. Vacancies decline in response to the shock when firms expect persistent job destruction and the number of unemployed searching for work is low. Quantitatively, under our baseline forecast the unemployment rate peaks at 19.7%, 2 months after the shock, and takes 1 year to return to 5%. Relative to a scenario without the shock, unemployment uncertainty rises by a factor of 11. Nonlinear methods are crucial. In the linear economy, the unemployment rate “only” rises to 9.2%, vacancies increase, and uncertainty is unaffected. In both cases, the severity of the COVID-19 shock depends on the separation rate persistence. |
| Keywords: | Pandemic; Vacancies; Unemployment Rate; Separation Rate; Nonlinear Solution; COVID-19 |
| JEL: | E24 E27 J63 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:87838&r=all |
| By: | Scott R. Baker; Nicholas Bloom; Steven J. Davis; Stephen J. Terry |
| Abstract: | Assessing the economic impact of the COVID-19 pandemic is essential for policymakers, but challenging because the crisis has unfolded with extreme speed. We identify three indicators – stock market volatility, newspaper-based economic uncertainty, and subjective uncertainty in business expectation surveys – that provide real-time forward-looking uncertainty measures. We use these indicators to document and quantify the enormous increase in economic uncertainty in the past several weeks. We also illustrate how these forward-looking measures can be used to assess the macroeconomic impact of the COVID-19 crisis. Specifically, we feed COVID-induced first-moment and uncertainty shocks into an estimated model of disaster effects developed by Baker, Bloom and Terry (2020). Our illustrative exercise implies a year-on-year contraction in U.S. real GDP of nearly 11 percent as of 2020 Q4, with a 90 percent confidence interval extending to a nearly 20 percent contraction. The exercise says that about 60 percent of the forecasted output contraction reflects a negative effect of COVID-induced uncertainty. |
| JEL: | D80 E17 E32 E66 L50 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26983&r=all |
| By: | Ferrando, Annalisa; Vermeulen, Philip; Durante, Elena |
| Abstract: | This paper provides new evidence on the channels of monetary policy transmission combining 9 million observations on firm level investment and high-frequency identified monetary policy shocks. We show that the reaction of firms’ investment to a monetary policy shock is heterogeneous along dimensions that correspond to the two main channels of monetary policy transmission. First, we show that young firms are more sensitive to monetary policy shocks, supporting the existence of a credit channel of monetary policy. Second, we document large cross-sectional heterogeneity related to the industry the firm operates in. We find that firms producing durable goods react more than others, which is consistent with traditional interest rate channel effects of monetary policy. Third, we find that the effect of monetary policy shocks is longer lived for firms that are durable goods producers than for young firms indicating that demand effects last longer than credit effects. JEL Classification: E22, E52 |
| Keywords: | investment, monetary policy shocks, monetary policy transmission |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202390&r=all |
| By: | Atsushi Tanaka (School of Economics, Kwansei Gakuin University) |
| Abstract: | Research on central bank capital and credibility evolved from the interests of developing countries to those of developed countries after the global financial crisis of the late 2000s. There is growing concern about central bank balance sheets at exit from quantitative easing. This paper surveys the literature in such a context. It starts by citing early literature which suggests that a central bank with insufficient capital may be pressured to pursue an inflationary policy at a time of crisis that jeopardizes its credibility. A theoretical analysis of this problem is carried out by the use of the central bank budget constraints and its intertemporal variant, leading to discussions on the solvency of the central bank. Several central banks make fiscal transfers to the government, and their solvency situation is influenced by whether a central bank has fiscal transfers to and from the government. |
| Keywords: | central bank, solvency, financial strength, monetary policy, quantitative easing |
| JEL: | E52 E58 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:208&r=all |
| By: | Laeven, Luc; Perez-Quiros, Gabriel; Rivas, María Dolores Gadea |
| Abstract: | We study the effects of credit over the business cycle, distinguishing between expansions and contractions. We find that there is a growth and risk trade-off in the pace of credit growth over the business cycle. While rapid credit growth tends to be followed by deeper recessions, we also find that credit growth has a positive impact on the duration of expansions. This poses a trade-off for the policymaker: Limiting the buildup of financial risk to avoid a deep recession can negatively affect the cumulation of economic growth during the expansion. We show that intermediate levels of credit growth maximize long-term growth while limiting volatility. Macroprudential policies should be used to manage this growth and risk trade-off, striking a balance between allowing expansions to last longer and avoiding deep recessions. JEL Classification: C22, E32, E61 |
| Keywords: | business cycles, credit growth, financial crisis, GDP-at-risk, macroprudential policies |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202397&r=all |
| By: | Grilli, Luca; Santoro, Domenico |
| Abstract: | In this paper we try to build a statistical ensemble to describe a cryptocurrency-based system, emphasizing an "affinity" between the system of agents trading in these currencies and statistical mechanics. We focus our study on the concept of entropy in the sense of Boltzmann and we try to extend such a definition to a model in which the particles are replaced by N agents completely described by their ability to buy and to sell a certain quantity of cryptocurrencies. After providing some numerical examples, we show that entropy can be used as an indicator to forecast the price trend of cryptocurrencies. |
| Keywords: | Cryptocurrency, Entropy, Prices Forecast, Boltzmann, Blockchain |
| JEL: | C02 C69 E44 E47 G12 G17 G19 |
| Date: | 2020–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99591&r=all |
| By: | Hubert Gabrisch (Wiesbaden Institute for Law and Economics (WILE)) |
| Abstract: | This study attempts to identify the short- and long-run components of the Kaldor-Verdoorn (KV) law in empirical economics. The law claims that demand dynamics drive productivity dynamics. The law is tested with a panel of ten Central and Eastern-European countries, where labour productivity and demand growth have been slowing since 2004/2006 and where fears of an end of convergent growth are spreading. Meanwhile, the gradual slowing of output and productivity growth applies not only to the region considered in this study, but it is also a global phenomenon that is occurring despite remarkable technical progress and that is referred to as the so-called productivity puzzle. However, this puzzle would be solved in light of the KV law. To test for the short-term and long-term properties of this law, least squares and autoregressive distributed lag (ARDL) models are applied. Our results confirm the law for the region; slower productivity growth is not due to 'adverse technological progress' but to weakening external and domestic demand. |
| Keywords: | Productivity conundrum, Kaldor-Verdoorn law, panel autoregressive distributed lag (ARDL) model, Eastern Europe. |
| JEL: | C23 E24 O47 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:318&r=all |
| By: | Fraser, Nancy; MacDonald, Cherique; Ooft, Gavin |
| Abstract: | This paper presents an assessment of financial inclusion in Suriname, mainly from the Central Bank’s perspective. It examines existing data on financial inclusion and policy initiatives and measures the Central Bank of Suriname has taken to stimulate financial inclusion. This research is mainly conducted through desk studies and is supported by interviews with various stakeholders involved with financial inclusion and education as well as with the relevant Central Bank departments in charge of national financial inclusion initiatives. Consequently, the study presents policy recommendations aimed at improving financial inclusion in Suriname, since it is an important contributor to monetary policy and a prerequisite for financial stability. |
| Keywords: | Financial Inclusion,Financial Services,Financial Literacy,Monetary Policy |
| JEL: | G29 O16 E44 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:215535&r=all |
| By: | Luigi Ventura; Charles Yuji Horioka |
| Abstract: | In this paper, we analyze the wealth accumulation and saving behavior of the retired elderly in Italy using micro data from the “Survey of Italian Households’ Income and Wealth,” a panel survey of households conducted every two years by the Bank of Italy. We find that, on average, the retired elderly in Italy are decumulating their wealth (dissaving) but that their wealth decumulation rates are much slower than expected. Moreover, we also find that more than 40 percent of the retired elderly in Italy are continuing to accumulate wealth and that more than 80 percent are doing positive amounts of saving. Thus, the Wealth Decumulation Puzzle (the tendency of the retired elderly to decumulate their wealth more slowly than expected) appears to apply in the case of Italy, as it does in most other countries, before as well as after the Global Financial Crisis. Moreover, our regression analysis of the determinants of the wealth accumulation and saving behavior of the retired elderly in Italy suggests that the lower than expected wealth decumulation rates and dissaving of the retired elderly in Italy is due largely to intergenerational transfers (bequests and inter vivos transfers) and saving for precautionary purposes, especially the former. |
| JEL: | D12 D14 D64 E21 J14 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26986&r=all |
| By: | Ari, Anil; Ratnovski, Lev; Chen, Sophia |
| Abstract: | This paper presents a new dataset on the dynamics of non-performing loans (NPLs) during 88 banking crises since 1990. The data show similarities across crises during NPL build-ups but less so during NPL resolutions. We find a close relationship between NPL problems—elevated and unresolved NPLs—and the severity of post-crisis recessions. A machine learning approach identifies a set of pre-crisis predictors of NPL problems related to weak macroeconomic, institutional, corporate, and banking sector conditions. Our findings suggest that reducing pre-crisis vulnerabilities and promptly addressing NPL problems during a crisis are important for post-crisis output recovery. JEL Classification: E32, E44, G21, N10, N20 |
| Keywords: | banking crises, crisis resolution, debt, non-performing loans, recessions |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202395&r=all |
| By: | Stéphane AURAY (CREST-Ensai and Université du Littoral Côte d'Opale. ENSAI, Campus de Ker-Lann, Rue Blaise Pascal, BP37203, 35172 BRUZ Cedex, France); Michel B. DEVEREUX (Vancouver School of Economics, University of British Columbia 6000, Iona Drive, Vancouver B.C. CANADA V6T 1L4, CEPR and NBER); Aurélien EYQUEM (Univ Lyon, Université Lumière Lyon 2, GATE L-SE UMR 5824, and Institut Universitaire de France. 93 Chemin des Mouilles, BP167, 69131 Ecully Cedex, France) |
| Abstract: | We build measures of the demand for trade protection, and relate it to permanent productivity and transitory monetary policy shocks identified from the U.S. monthly and quarterly data. The demand for protection is counter-cyclical conditional on productivity shocks and pro-cyclical conditional on monetary policy shocks. We then layout a two-country dynamic general equilibrium model with trade in intermediate and final goods, sticky prices, incomplete financial markets and endogenous monetary policy rules, and propose a repeated non-cooperative policy game that determines tariffs endogenously. These tradepolicies (i) are consistent with small but positive tariffs, as in the data, and (ii) fit empirical evidence about the cyclical pattern of the demand for trade protection under a wide range of plausible model calibrations. We then use the model to quantify the macroeconomic and welfare effects of a change in tariff setters' preferences that induces tariffs to rise in both countries. |
| Keywords: | Protectionism, Tariffs, Business Cycle. |
| JEL: | F30 F40 F41 |
| Date: | 2018–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2020-08&r=all |
| By: | Tarek Alexander Hassan; Stephan Hollander; Laurence van Lent; Ahmed Tahoun |
| Abstract: | Using tools described in our earlier work (Hassan et al., 2019, 2020), we develop text- based measures of the costs, benefits, and risks listed firms in the US and over 80 other countries associate with the spread of Covid-19 and other epidemic diseases. We identify which firms expect to gain or lose from an epidemic disease and which are most affected by the associated uncertainty as a disease spreads in a region or around the world. As Covid-19 spreads globally in the first quarter of 2020, we find that firms' primary concerns relate to the collapse of demand, increased uncertainty, and disruption in supply chains. Other important concerns relate to capacity reductions, closures, and employee welfare. By contrast, financing concerns are mentioned relatively rarely. We also identify some firms that foresee opportunities in new or disrupted markets due to the spread of the disease. Finally, we find some evidence that firms that have experience with SARS or H1N1 have more positive expectations about their ability to deal with the coronavirus outbreak. |
| JEL: | E0 E6 F0 G12 I0 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26971&r=all |
| By: | J. David Lopez-Salido; Francesca Loria |
| Abstract: | We investigate how macroeconomic drivers affect the predictive inflation distribution as well as the probability that inflation will run above or below certain thresholds over the near term. This is what we refer to as Inflation-at-Risk–a measure of the tail risks to the inflation outlook. We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the conditional predictive distribution of inflation that remains even when focusing on the post-2000 period of stable and low mean inflation. We also document that in the United States and in the Euro Area tight financial conditions carry substantial downside inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails. |
| Keywords: | Quantile regression; Inflation risks |
| JEL: | C21 E31 |
| Date: | 2020–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-13&r=all |
| By: | Michael J. Fleming; Asani Sarkar; Peter Van Tassel |
| Abstract: | The Federal Reserve has taken unprecedented actions to mitigate the effects of the COVID-19 pandemic on U.S. households and businesses. These measures include cutting the Fed’s policy rate to the zero lower bound, purchasing Treasury and mortgage-backed securities (MBS) to promote market functioning, and establishing several liquidity and credit facilities. In this post, we briefly review the developments motivating these actions, summarize what the Fed has done and why, and compare the Fed’s response with its response to the 2007-09 financial crisis. |
| Keywords: | COVID-19; coronavirus; pandemic; Federal Reserve |
| JEL: | E52 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87801&r=all |
| By: | Callum J. Jones; Thomas Philippon; Venky Venkateswaran |
| Abstract: | We study the response of an economy to an unexpected epidemic. Households mitigate the spread of the disease by reducing consumption, reducing hours worked, and working from home. Working from home is subject to learning-by-doing and the capacity of the health care system is limited. A social planner worries about two externalities, an infection externality and a healthcare congestion externality. Private agents’ mitigation incentives are weak and biased. We show that private safety incentives can even decline at the onset of the epidemic. The planner, on the other hand, implements front-loaded mitigation policies and encourages working from home immediately. In our calibration, assuming a CFR of 1% and an initial infection rate of 0.1%, private mitigation reduces the cumulative death rate from 2.5% of the initially susceptible population to about 1.75%. The planner optimally imposes a drastic suppression policy and reduces the death rate to 0.15% at the cost of an initial drop in consumption of around 25%. |
| JEL: | E2 E6 I1 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26984&r=all |
| By: | Nataliia Ostapenko |
| Abstract: | I propose a new approach to identifying exogenous monetary policy shocks that requires no priors on the underlying macroeconomic structure, nor any observation of monetary policy actions. My approach entails directly estimating the unexpected changes in the federal funds rate as those which cannot be predicted from the internal Federal Open Market Committee's (FOMC) discussions. I employ deep learning and basic machine learning regressors to predict the effective federal funds rate from the FOMC's discussions without imposing any time-series structure. The result of the standard three variable Structural Vector Autoregression (SVAR) with my new measure shows that economic activity and inflation decline in response to a monetary policy shock. |
| Keywords: | monetary policy, identification, shock, deep learning, FOMC, transcripts |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mtk:febawb:123&r=all |
| By: | Federico Sturzenegger (Universidad de San Andres) |
| Abstract: | Discussion on the optimal fiscal response to lockdowns is just starting. In this note, we make a simple yet apparently ignored point. If a lockdown entails a reduction in the desire for consumption the optimal response is to reduce consumption, a response that I call "hibernation". In this case, attempts to smooth the effect of the lockdown, which has been the almost universal recommendation to deal with Covid-19, leads to welfare losses. |
| Keywords: | fiscal policy, consumption |
| JEL: | E20 H30 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:137&r=all |
| By: | Charles Ka Yui Leung; Joe Cho Yiu Ng; Edward Tang |
| Abstract: | The house price in Hong Kong is well-known to be "unaffordable." This paper argues that the commonly used house price-to-income ratio may be misleading in an economy with almost half of the population living in either public rental housing or subsidized ownership. Moreover, we re-focus on the relationships between economic fundamentals and the housing market of Hong Kong. While the aggregate GDP, population and longevity continue to grow, the real wage and household income fall behind. The trend component of the real GDP growth suffers a permanent downward shift after the first quarter of 1989 (a “political scar”). The trend component of real wage growth is close to zero, and the counterpart of real consumption and real investment decline steadily. Meanwhile, the trend component of the real housing rent and price display patterns that decouple from the macroeconomic variables. We also discuss the directions for future research. |
| Keywords: | wage index and household income; time series decomposition; migration; structural break; housing demand |
| JEL: | E20 J01 R0 |
| Date: | 2020–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:87846&r=all |
| By: | Christopher Busch; Dirk Krueger; Alexander Ludwig; Irina Popova; Zainab Iftikhar |
| Abstract: | In 2015-2016 Germany experienced a wave of predominantly low-skilled refugee immigration. We evaluate its macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign born and native workers. Workers are modelled as imperfect substitutes in aggregate production leading to endogenous wage differentials. We simulate the dynamic effects of this refugee wave, with specific focus on the welfare impact on low skilled natives. Our results indicate that the small losses this group suffers can be compensated by welfare gains of other parts of the native population. |
| JEL: | E20 F22 H55 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26973&r=all |
| By: | Benchimol, Jonathan; Ivashchenko, Sergey |
| Abstract: | Uncertainty about a regime’s economy can change drastically around a crisis. An imported crisis such as the global financial crisis in the Euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the Euro area and United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with in calm periods. We describe how US shocks from both the real economy and financial markets affected the Euro area economy and how bond reallocation occurred between short- and long-term maturities during the global financial crisis. Importantly, the estimated nonlinearities when domestic and foreign financial markets influence the economy should not be neglected. The nonlinear behavior of market-related variables highlights the importance of higher-order estimation for providing additional interpretations to policymakers. |
| Keywords: | DSGE; Volatility Shocks; Markov Switching; Open Economy; Financial Crisis; Nonlinearities |
| JEL: | C61 E32 F21 F41 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:060&r=all |
| By: | Fernando E. Alvarez; David Argente; Francesco Lippi |
| Abstract: | We study the optimal lockdown policy for a planner who wants to control the fatalities of a pandemic while minimizing the output costs of the lockdown. We use the SIR epidemiology model and a linear economy to formalize the planner's dynamic control problem. The optimal policy depends on the fraction of infected and susceptible in the population. We parametrize the model using data on the COVID19 pandemic and the economic breadth of the lockdown. The quantitative analysis identifies the features that shape the intensity and duration of the optimal lockdown policy. Our baseline parametrization is conditional on a 1% of infected agents at the outbreak, no cure for the disease, and the possibility of testing. The optimal policy prescribes a severe lockdown beginning two weeks after the outbreak, covers 60% of the population after a month, and is gradually withdrawn covering 20% of the population after 3 months. The intensity of the lockdown depends on the gradient of the fatality rate as a function of the infected, and on the assumed value of a statistical life. The absence of testing increases the economic costs of the lockdown, and shortens the duration of the optimal lockdown which ends more abruptly. Welfare under the optimal policy with testing is higher, equivalent to a one-time payment of 2% of GDP. |
| JEL: | E6 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26981&r=all |
| By: | Chunya Bu; John Rogers; Wenbin Wu |
| Abstract: | Standard structural VAR models and estimation using Romer and Romer (2004) monetary policy shocks show that, in samples after the 1980s, a contractionary conventional monetary policy shock generates smaller and sometimes perversely-signed impulse responses compared to earlier samples. Using insights from the central bank information effects literature, we show that the analyses producing these results suffer from an omitted variables problem related to forward-looking information emanating from Federal Reserve forecasts. Transmission of conventional monetary policy shocks takes on the standard signs, and is typically significant, once Fed forward-looking information is taken into account. This reconciliation does not follow from adding private sector forecasts to the estimation frameworks. |
| Keywords: | Information effect; Monetary policy; VARs |
| Date: | 2020–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-14&r=all |
| By: | Raphael Auer; Stijn Claessens |
| Abstract: | Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions. |
| JEL: | E42 E51 F31 G12 G28 G32 G38 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:87847&r=all |
| By: | Francois R. Velde |
| Abstract: | Burns and Mitchell (1946, 109) found a recession of “exceptional brevity and moderate amplitude.” I confirm their judgment by examining a variety of high-frequency data. Industrial output fell sharply but rebounded within months. Retail seemed little affected and there is no evidence of increased business failures or stressed financial system. Cross-sectional data from the coal industry documents the short-lived impact of the epidemic on labor supply. The Armistice possibly prolonged the 1918 recession, short as it was, by injecting momentary uncertainty. Interventions to hinder the contagion were brief (typically a month) and there is some evidence that interventions made a difference for economic outcomes. |
| Keywords: | 1918 Flu Pandemic; Covid-19; Labor Supply |
| JEL: | E32 I10 I18 H1 J22 |
| Date: | 2020–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:87812&r=all |
| By: | YiLi Chien; Yi Wen; HsinJung Wu |
| Abstract: | The rapidly growing national debt in the U.S. since the 1970s has alarmed and intrigued the academic world. Consequently, the concept of dynamic (in)efficiency in an overlapping generations (OLG) world and the importance of the heterogeneous-agents and incomplete markets (HAIM) hypothesis to justify a high debt-to-GDP ratio have been extensively studied. Two important consensus emerge from this literature: (i) The optimal quantity of public debt is positive—due to insufficient private liquidity to support private saving and investment (see, e.g., Barro (1974), Woodford (1990), and Aiyagari and McGrattan (1998)); (ii) the optimal capital tax is positive—because of precautionary saving and the consequent failure of the modified golden rule (see, e.g., Aiyagari (1995)). But these two consensus views are seldom derived jointly in the same model, so the dynamic relationship between optimal debt and optimal taxation remains unclear in HAIM models, especially considering that the optimal quantity of debt must be judged by the golden-rule saving rate and any debt must be financed by future taxes. We use a primal Ramsey approach to analytically characterize optimal debt and tax policy in an OLG-HAIM model. We show that since precautionary saving and oversaving are not necessarily the same thing, they have different policy implications—the Ramsey planner opts to issue bonds to crowd out private savings if and only if a competitive equilibrium is dynamically inefficient regardless of precautionary savings. In other words, optimal debt can be negative even if households cannot insure themselves against idiosyncratic risk under borrowing constraints. The sign and magnitude of the optimal quantity of debt in turn dictate the sign and magnitude of optimal taxes as well as the priority order of tax tools such as a labor tax vs. a capital tax. |
| Keywords: | Role of Public Debt; Optimal Fiscal Policy; Ramsey Problem; Overlapping Generation; Incomplete Markets |
| JEL: | E13 E62 H21 H30 |
| Date: | 2020–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:87831&r=all |
| By: | Andrew Foerster; Christian Matthes |
| Abstract: | Total factor productivity (TFP) and investment specific technology (IST) growth both exhibit regime-switching behavior, but the regime at any given time is difficult to infer. We build a rational expectations real business cycle model where the underlying TFP and IST regimes are unobserved. We then develop a general perturbation solution algorithm for a wide class of models with unobserved regime-switching. Using our method, we show that learning about regime-switching alters the responses to regime shifts and intra-regime shocks, increases asymmetries in the responses, generates forecast error bias even with rational agents, and raises the welfare cost of fluctuations. |
| Keywords: | Bayesian learning; regime switching; technology growth |
| JEL: | E13 E32 C63 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:87843&r=all |
| By: | Sydney C. Ludvigson; Sai Ma; Serena Ng |
| Abstract: | The outbreak of covid19 has significantly disrupted the economy. This note attempts to quantify the macroeconomic impact of costly and deadly disasters in recent US history, and to translate these estimates into an analysis of the likely impact of covid19. A costly disaster series is constructed over the sample 1980:1-2019:12 and the dynamic impact of a costly disaster shock on economic activity and on uncertainty is studied using a VAR. Unlike past natural disasters, covid19 is a multi-month shock that is not local in nature, disrupts labor market activities rather than destroys capital, and harms the social and physical well being of individuals. Calibrating different shock profiles to reflect these features, we find that the effects of the event last from two months to over a year, depending on the sector of the economy. Even a conservative calibration of a 3-month, 60 standard deviation shock is forecast to lead to a cumulative loss in industrial production of 12.75% and in service sector employment of nearly 17% or 24 million jobs over a period of ten months, with increases in macro uncertainty that last five months. |
| JEL: | E17 I0 I3 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26987&r=all |
| By: | David M. Byrne; Carol Corrado |
| Abstract: | Consumer digital access services—internet, mobile phone, cable TV, and streaming—accounted for over 2 percent of U.S. household consumption in 2018. We construct prices for these services using direct measures of volume (data transmitted, talk time, and hours of programming). Our price index fell 12 percent per year from 1988 to 2018 while official prices moved up modestly. Using our digital services index, we estimate total personal consumption expenditure (PCE) prices have risen nearly 1/2 percentage point slower than the official index since 2008. Importantly, the spread between alternative and official PCE price inflation has increased noticeably over time. |
| Keywords: | Price measurement; Consumer digital services; Innovation; Information and Communication Technology (ICT); National accounting |
| JEL: | E31 L86 O33 |
| Date: | 2020–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-21&r=all |
| By: | Ryoji Hasegawa (Fukuyama City University); Masaya Yasuoka (Kwansei Gakuin University) |
| Abstract: | Long-term care insurance plays an important role in Japan, where dual problems of an aging population and low birthrate have continued. Such insurance affects the macro-economy through many mechanisms, with both negative and positive influences. Although increased taxes and insurance premiums from long-term care decrease consumption, decreasing precautionary saving eventually increases consumption because of decreased risks of long-term care and mitigation of self-payment for people receiving long-term care services. Furthermore, effects on household consumption by the aging population and low birthrate are expected to differ among regional economies. This study, particularly addressing insurance effects on household consumption and the regional economy, develops a theoretical model for household consumption and assesses numerical examples of macroeconomic effects using parameters that are consistent with data for Japan. Furthermore, using a multi-regional input?output (MRIO) table at the prefectural level in Japan, we examine long-term care insurance effects on household consumption and economic ripple effects occurring regionally and nationally. The results reveal differences in insurance effects by region and by household generation. Gross Domestic Product (GDP), representing total economic activity, rises. Gross Regional Product (GRP) can also be pulled up. However, because of a difference in the degrees of increase in GRP in the respective regions, GRP inequality can be magnified. Specifically considering these results, we assess relations between regional economic disparities and improvements in long-term care insurance. |
| Keywords: | Elderly care subsidy, Household consumption, Multi-regional Input?Output (MRIO) table, Precautionary saving |
| JEL: | R15 E21 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:209&r=all |
| By: | Daniel J. Lewis; Karel Mertens; James H. Stock |
| Abstract: | This paper describes a weekly economic index (WEI) developed to track the rapid economic developments associated with the response to the novel Coronavirus in the United States. The WEI shows a strong and sudden decline in economic activity starting in the week ending March 21, 2020. In the most recent week ending April 4, the WEI indicates economic activity has fallen further to -8.89% scaled to 4-quarter growth in GDP. |
| Keywords: | Weekly Economic Index; High Frequency; Measurement of Economic Activity; COVID-19 |
| JEL: | C51 E01 E66 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:87839&r=all |
| By: | Sanjeev Gupta (Center for Global Development); Jianhong Liu (Center for Global Development) |
| Abstract: | In this paper, we estimate short- and long-term tax buoyancy for 44 sub-Saharan African (SSA) countries during 1980-2017 using time series and panel techniques. The buoyancy of the tax system captures the response of tax revenues to changes in national income including discretionary changes. We find that the long-term tax buoyancy is either one or slightly above one for most SSA countries. Fragile states have a lower short-term tax buoyancy reflecting their institutional weaknesses. Short-term buoyancy of personal income tax is significantly less than one. Both short- and long-run tax responses are lower than those reported in previous cross-country studies, which can be interpreted as a reduced power of both automatic stabilization in the short-run and fiscal sustainability in the long-run. Our results are robust to discretionary tax changes. We find that central government debt and shadow economy exert a downward pressure on tax buoyancy. An important implication of these results is that the current tax systems in SSA would not be able generate domestic revenues to the extend needed for financing the Sustainable Development Goals (SDGs). This is illustrated for the entire region and two SSA countries, Benin and Rwanda. |
| Keywords: | Tax buoyancy, Sustainable Development Goals, Error Correction Model, fiscal sustainability, sub-Saharan Africa |
| JEL: | E62 H20 H24 H25 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:532&r=all |
| By: | Claudiu Tiberiu Albulescu; Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries. |
| Keywords: | inflation forecasts,monetary overhang,money demand stability,CEE countries,currency substitution |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01720319&r=all |
| By: | Leonid Kogan; Dimitris Papanikolaou; Lawrence D. W. Schmidt; Jae Song |
| Abstract: | We examine the relation between technological progress and the riskiness of labor income. Motivated by a simple model of creative destruction, we draw a distinction between technological innovation advanced by the firm, or its competitors. Using administrative data from the United States, we find that own firm innovation is associated with a modest increase in worker earnings growth, while innovation by competing firms is related to lower future worker earnings. Importantly, these earnings changes are asymmetrically distributed across workers: both gains and losses are concentrated on a subset of workers, which implies that the distribution of worker earnings growth rates becomes more right- or left-skewed following innovation by the firm, or its competitors, respectively. These effects are particularly strong for the highest-paid workers. Our results therefore suggest innovation is associated with a substantial increase in the labor income risk, especially for workers at the top of the earnings distribution. Our simulations reveal that the increased disparity in innovation outcomes across firms in the 1990s can account for a significant part of the recent rise in income inequality. |
| JEL: | E24 G10 G12 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26964&r=all |
| By: | Serafin Frache; Rodrigo Lluberas |
| Abstract: | Using data from a unique and novel monthly firm-level survey on inflation expectations in Uruguay we first present stylized facts about the inflation expectation formation process and then show how information acquisition affects firms' inflation expectations. We show that firms' forecasts are close to observed inflation, that a sizable proportion of firms do not revise their expectations, and that there is substantial disagreement about future inflation among firms. We also present evidence on industrial sector effects on inflation forecasts and show that the correlation between inflation expectations and cost expectations increases with the forecast time horizon. We then exploit peculiarities of the collective wage bargaining negotiation mechanism to estimate the impact of acquiring information about past inflation on expected future inflation. Our results imply that firms that adjust wages expect lower inflation, revise their expectations downwards and make smaller forecast errors than firms that do not adjust wages. We find no effect of wage adjustments on firms' own cost expectations and that disagreement among firms is lower in the months of wage adjustment. The latter suggests that inflation expectations tend to converge as firms are more informed about past inflation. |
| Keywords: | inflation expectations, firm's survey, new information |
| JEL: | D22 D84 E31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:mnt:wpaper:1905&r=all |
| By: | Cotofan, Maria (Erasmus University Rotterdam); Cassar, Lea (University of Cologne); Dur, Robert (Erasmus University Rotterdam); Meier, Stephan (Columbia University) |
| Abstract: | Preferences for monetary and non-monetary job attributes are important for understanding workers' motivation and the organization of work. Little is known, however, about how those job preferences are formed. We study how macroeconomic conditions when young shape workers' job preferences for the rest of their life. Using variation in income-per-capita across US regions and over time since the 1920s, we find that job preferences vary in systematic ways with macroeconomic conditions. Recessions create cohorts of workers who give higher priority to income, whereas booms make cohorts care more about job meaning, for the rest of their life. |
| Keywords: | preferences for job attributes, experience, macroeconomic condition, generational dierence |
| JEL: | D9 J2 M5 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13123&r=all |
| By: | Drymouras, Vasileios |
| Abstract: | An alternative wallet for the European citizens during and after the pandemic crisis, without the issuance of new money or the increase of public debt. |
| Keywords: | pandemic crisis |
| JEL: | E20 H50 H60 |
| Date: | 2020–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99557&r=all |
| By: | Burriel, Pablo; Chronis, Panagiotis; Freier, Maximilian; Hauptmeier, Sebastian; Reiss, Lukas; Stegarescu, Dan; Van Parys, Stefan |
| Abstract: | After the financial and economic crisis in Europe, a broad consensus has emerged that a stronger fiscal dimension may be needed to complete the architecture of Economic and Monetary Union (EMU). This paper analyses the performance of interregional transfers in existing fiscal-federal systems, notably in Austria, Belgium, Germany, Spain and the United States, and aims to draw lessons for the design of a euro area fiscal instrument. The empirical risk-sharing analysis in this paper suggests that effective cross-regional stabilisation of asymmetric shocks tends to work via direct cash transfers to households, such as unemployment benefits, which are financed out of cyclical central government taxes and social security contributions. This would suggest that a euro area budgetary instrument for stabilisation should be designed as a tool that enhances the automatic stabilisation capacity in the single currency area. At the same time, it seems important that a prospective central stabilisation instrument for the euro area would be integrated in an overall fiscal policy framework that ensures proper incentives for national policymakers. JEL Classification: E62, H11, H77 |
| Keywords: | euro area fiscal capacity, fiscal federalism, fiscal risk-sharing |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2020239&r=all |
| By: | Joana David Avritzer (Department of Economics, New School for Social Research) |
| Abstract: | This paper discusses the possibility of estimating a long run relationship between income distribution and growth. As emphasized by Blecker (2016), the neo-Kaleckian empirical literature has focused on the estimation of a short run relationship. This paper contributes to the debate by looking at a long term relationship through the use of filtering methods. We first estimate the long run component (or "trend" component) of the relevant variables using various types of filters. Second, we run causality tests and frequentist OLS estimations to test for the relationship between the estimated trend components. We find that there is little difference between the results of each filter and there is a significant long run relationship between capacity utilization and, therefore, aggregate demand, and income distribution. This relationship is shown, furthermore, to be positive, in other words, the higher the wage share, the higher is aggregate demand in the long run. |
| Keywords: | Functional income distribution, economic growth, filtering methods |
| JEL: | E11 E12 C10 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:2004&r=all |
| By: | Akhilesh K. Verma (Indira Gandhi Institute of Development Research); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | We examine the role of external debt financing (EDF) in shaping the credit cycle and output fluctuations in nine major emerging economies. We show that sharp fluctuations in EDF flows are significantly associated with credit surge and stop episodes in emerging market economies (EMEs). However the association is asymmetric in nature - a stop episode in EDF flows is more likely to bring about a credit stop episode compared to an EDF surge episode. We extend our framework to analyze the joint spillover of EDF flows and credit cycles on business cycle fluctuations in these EMEs. We find that EDF lows and credit together have a strong association with output growth. After dividing the sample into EDF surge and stop phases, we find evidence of asymmetric spillover of credit on output growth. Credit decline during EDF stop episode leads to a larger decline in GDP growth relative to the impact of an increase in credit growth during EDF surges. Our analysis points to the vulnerability of credit cycles of EMEs to the sharp movement in EDF flows which in turn is largely synchronized with external financing conditions. The strong negative spillover of EDF stop phases on the business cycle is a cause of concern for policymakers in EMEs who seek to insulate their economies from such external shocks. |
| Keywords: | External debt finance, Credit cycle, Dynamic panel GMM, Business cycle |
| JEL: | E47 E51 F34 F65 G15 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2020-012&r=all |
| By: | Ryo Horii; Yoshiyasu Ono |
| Abstract: | In a simple continuous-time model where the learning process affects the willingness to hold liquidity, we provide an intuitive explanation of business cycle asymmetry and post-crisis slow recovery. When observing a liquidity shock, individuals rationally increase their subjective probability of re-encountering it. It leads to an upward jump in liquidity preference and a discrete fall in consumption. Conversely, as a period without shocks continues, they gradually decrease the subjective probability, reduce liquidity preference, and increase consumption. The recovery process is particularly slow after many shocks are observed within a short period because people do not easily change their pessimistic view. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1085&r=all |
| By: | Daleep Singh |
| Abstract: | Remarks before the Money Marketeers of New York University (delivered via audio webinar). |
| Keywords: | Commercial Paper Funding Facility; Corporate Credit Facilities (CCFs); primary market corporate credit facility (PMCCF); secondary market corporate credit facility (SMCCF); Municipal Liquidity Facility; Paycheck Protection Program Liquidity Facility; Main Street Lending Program; Term Asset-Backed Securities Loan Facility (TALF); CARES Act |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:87828&r=all |
| By: | Alexander W. Bartik; Marianne Bertrand; Zoë B. Cullen; Edward L. Glaeser; Michael Luca; Christopher T. Stanton |
| Abstract: | In addition to its impact on public health, COVID-19 has had a major impact on the economy. To shed light on how COVID-19 is affecting small businesses – and on the likely impact of the recent stimulus bill, we conducted a survey of more than 5,800 small businesses. Several main themes emerge from the results. First, mass layoffs and closures have already occurred. In our sample, 43 percent of businesses are temporarily closed, and businesses have – on average – reduced their employee counts by 40 percent relative to January. Second, consistent with previous literature, we find that many small businesses are financially fragile. For example, the median business has more than $10,000 in monthly expenses and less than one month of cash on hand. Third, businesses have widely varying beliefs about the likely duration of COVID related disruptions. Fourth, the majority of businesses planned to seek funding through the CARES act. However, many anticipated problems with accessing the aid, such as bureaucratic hassles and difficulties establishing eligibility. |
| JEL: | E65 L20 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26989&r=all |
| By: | Federal Reserve Bank Kansas City |
| Keywords: | Monetary Policy |
| Date: | 2019–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkpr:87791&r=all |
| By: | Hans Gersbach (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland); Evgenij Komarov (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland) |
| Abstract: | We develop a model to rationalize and examine so-called “research bubbles”, i.e. research activities based on overoptimistic beliefs about the impact of this research on the economy. Research bubbles occur when researchers selfselect into research activities and the government aggregates the assessment of active researchers on the way advances in research may spur innovation and growth. In an overlapping generations framework, we study the occurrence of research bubbles and show that they tend to be welfare-improving. Particular forms can even implement the socially optimal solution. However, research bubbles can collapse, and we discuss institutional devices and the role of debt financing that ensure the sustainability of such bubbles. Finally, we demonstrate that research bubbles emerge in various extensions of our baseline model. |
| Keywords: | Endogenous Growth, Basic Research and Macro-Based Behavioral Economics |
| JEL: | E02 O32 O41 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:20-331&r=all |
| By: | Arellano-Bover, Jaime (Yale University) |
| Abstract: | This paper studies the impact of labor market conditions during the education-to-work transition on workers' long-term skill development. Using representative survey data on measures of work-relevant cognitive skills for adults from 19 countries, I document four main findings: i) cohorts of workers who faced higher unemployment rates at ages 18–25 have lower skills at ages 36–59; ii) unemployment rates faced at later ages (26–35) do not have such an effect; iii) the former findings hold even though, on average, people get more formal education as a response to higher unemployment in their late teens and early twenties; iv) skill inequality is affected: workers whose parents were less educated bear most of the negative effects. These findings can be rationalized by on-the-job learning during the early twenties being an important factor of skill-development, and such learning being negatively impacted by bad macroeconomic conditions. Using German panel data on skills, I show that young workers at large firms experience higher skill growth than those at small firms. This finding suggests firm heterogeneity in human capital provision to young workers as a potential mechanism since, in bad economic times, young workers disproportionately match with small firms. |
| Keywords: | labor market entry, macroeconomic conditions, measures of skills, cognitive skills, on-the-job learning, firms |
| JEL: | J24 J23 E24 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13129&r=all |
| By: | Elma Hasanovic (Central Bank of Bosnia and Herzegovina) |
| Abstract: | The purpose of this paper is to evaluate the performance of some leading univariate and multivariate models: ARIMA, the standard OLS VAR and Bayesian VAR models, in forecasting inflation in Bosnia and Herzegovina. Although the presented models are small and highly aggregated, they provide a convenient framework to illustrate practical forecast issues. Furthermore, they are a good starting point in the process of the forecast development. The empirical part of this paper estimates the domestic and international transmission effects on inflation and tries to find good predictors of the inflation. A variety of inflation indicators included in the VAR models are assessed as potential predictors of inflation. They have been suggested by economic theory and existing research. A pseudo out-of-sample forecast approach is employed to assess the models’ performance at different horizons using a recursive strategy. The study then evaluates the relative forecast performance of univariate model and various alternative specifications of the VAR models and offers conclusions. The results confirm the significant improvement in forecasting performance at all forecast horizons when Bayesian techniques, which incorporate information from the likelihood function and some informative prior distributions, are used. |
| Keywords: | Bayesian VAR, model selection, inflation forecasting |
| Date: | 2020–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp07-2020&r=all |
| By: | Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri |
| Abstract: | Drastic public health measures such as social distancing or lockdowns can reduce the loss of human life by keeping the number of infected individuals from exceeding the capacity of the health care system but are often criticized because of the social and the economic cost they entail. We question this view by combining an epidemiological model, calibrated to capture the spread of the COVID-19 virus, with a multisector model, designed to capture key characteristics of the U.S. Input Output Tables. Our two-sector model features a core sector that produces intermediate inputs not easily replaced by inputs from the other sector, subject to minimum-scale requirements. We show that, by affecting workers in this core sector, the high peak of an infection not mitigated by social distancing may cause very large upfront economic costs in terms of output, consumption and investment. Social distancing measures can reduce these costs, especially if skewed towards non-core industries and occupations with tasks that can be performed from home, helping to smooth the surge in infections among workers in the core sector. |
| Keywords: | COVID-19; Epidemic; Recession; Infectious disease |
| JEL: | E10 E30 I10 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-31&r=all |
| By: | Sen, Ali |
| Abstract: | I analyze structural change within the services sector and its implications for Baumol's cost disease and cross-country productivity differences. My results show that Baumol's cost disease becomes less relevant over development: It generates minor declines on aggregate productivity growth rate and accounts for a small share of the productivity growth slow- down. I argue that the existence of services sub-sectors with high-productivity growth rates, progressive services, and their substitutability with other sectors in the economy rationalize these facts. A model consistent with these stylized facts predict that Baumol's cost disease would depress aggregate productivity growth rate less in the future for developed countries. I later analyze cross-country productivity differences. The results in Duarte and Restuccia (2010) hide discrepancies between different services sub-sectors: Although developed countries have caught-up the US in the low-productivity growth services sub-sectors, stagnant services, the opposite conclusions emerge for the progressive/business services. I conclude that the substitutability between progressive/business and stagnant services sectors contribute to increasing aggregate productivity differences between the US and other developed countries. To put differently, structural change facts that limit Baumol's cost disease also advance cross-country productivity differences. |
| Keywords: | structural change, services, Baumol's cost disease, aggregate productivity. |
| JEL: | E01 O41 O47 O57 |
| Date: | 2020–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99614&r=all |
| By: | Andrew Glover (Federal Reserve Bank of Kansas City); Jonathan Heathcote (Federal Reserve Bank of Minneapolis and CEPR); Dirk Krueger (University of Pennsylvania and CEPR); Jose-Victor Rios-Rull (University of Pennsylvania, UCL, CAERP, CEPR and NBER) |
| Abstract: | To slow the spread of COVID-19, many countries are shutting down non-essential sectors of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young and retired), by sector (basic and luxury), and by health status. Disease transmission occurs in the workplace, in consumption activities, at home, and in hospitals. We study the optimal economic mitigation policy of a utilitarian government that can redistribute across individuals, but where such redistribution is costly. We show that optimal redistribution and mitigation policies interact, and reflect a compromise between the strongly diverging preferred policy paths of different subgroups of the population. We find that the shutdown in place on April 12 is too extensive, but that a partial shutdown should remain in place through July.Length: 81 pages |
| Keywords: | COVID-19; Economic Policy; Redistribution |
| Date: | 2020–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:20-014&r=all |
| By: | Stephen T. Onifade (Åželcuk University Konya, Turkey); SavaÅŸ Çevik (Åželcuk University Konya, Turkey); SavaÅŸ ErdoÄŸan (Åželcuk University Konya, Turkey); Simplice A. Asongu (Yaoundé, Cameroon); Festus Victor Bekun (Lenin Aven., Chelyabinsk, Russia) |
| Abstract: | The impacts of public expenditures on economic growth have been revisited in this paper with respect to capital expenditure, recurrent expenditure and the government fiscal expansion in line with support for the budgetary allocations to various sectors in the context of the Nigerian economy. The Pesaran ARDL approach has been applied to carry out the impact analysis using annual time series data from 1981 to 2017. Empirical findings support the existence of a level relationship between public spending indicators and economic growth in Nigeria. Incisively, recurrent expenditures of government were found to be significantly impacting on economic growth in a negative way while the positive impacts of public capital expenditures were not significant to economic growth over the period of the study. Further results from the granger causality test reveal that fiscal expansion of the government that is hinged on debt financing is strongly granger causing public expenditures and domestic investment with the latter also granger causing real growth in the economy. We, therefore, provide some important policy recommendations following the results of the empirical analysis. |
| Keywords: | Nigeria; Fiscal policies; Economic Growth; Debt to GDP ratio; ARDL Models |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:19/096&r=all |
| By: | Marianne Haraldsvik (Department of Economics, Norwegian University of Science and Technology; Center for Economic Research at NTNU); Bjarne Strøm (Department of Economics, Norwegian University of Science and Technology) |
| Abstract: | Do individuals finishing compulsory school in economic downturns end up with higher skills in adulthood than comparable individuals that finish compulsory school in economic upturns? This paper answers this question by exploring data on country unemployment rates combined with individual data on educational attainment and adult skills in numeracy and literacy from the Program for the International Assessment of Adult Competencies (PIAAC) and the Adult Literacy and Life Skills Survey (ALL). We find that completed education is countercyclical, and the same pattern is found for adult skills in numeracy and literacy. The results are fairly robust across different model specifications including fixed country and cohort effects and country specific cohort trends. The results indicates that the labor market conditions at the time when young people make crucial educational decisions have long lasting effect on skills and potential earnings in adulthood. |
| Keywords: | Human capital accumulation, business cycles, adult skills |
| JEL: | E24 I2 J2 |
| Date: | 2020–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:nst:samfok:18520&r=all |
| By: | Bayer, Christian (University of Bonn); Kuhn, Moritz (University of Bonn) |
| Abstract: | COVID-19 is spreading and has reached the state of a worldwide pandemic and health systems are or will be tested in how they can deal with it. So far, during this early phase of the pandemic, outcomes in terms of case-fatality rates (CFR) differ widely across countries. We explore how differences in living arrangements of generations within families contribute to the cross country differences. We document a strong positive correlation between countries' CFRs and the share of working-age families living with their parents. This suggest that policy needs to focus on inter-generational social distance when combating this pandemic. |
| Keywords: | COVID crisis, COVID-19 |
| JEL: | E00 I14 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13114&r=all |
| By: | Leonor Modesto (UCP, Catolica Lisbon School of Business and Economics, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Carine Nourry (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Alain Venditti (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, EDHEC - EDHEC Business School) |
| Abstract: | The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt hold by domestic households is high enough, global indeterminacy does not occur. |
| Keywords: | small open economy,public debt,credit constraint,indeterminacy |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02545137&r=all |
| By: | Stéphane AURAY (CREST-ENSAI and ULCO); David L. FULLER (University of Wisconsin-Oshkosh); Guillaume VANDENBROUCKE (Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166, USA) |
| Abstract: | The prevalence of multiple job holders in the U.S. data is trending down since the mid 1990s, and cross-sectional data reveal two seemingly contradictory patterns regarding multiple job holders: (i) conditional on education the most productive workers are the least likely to hold multiple jobs; (ii) the most educated workers are the most likely to hold multiple jobs, even though they are the most productive. We develop an equilibrium model of the labor market to understand these facts. A dominating income effect explains both the negative correlation with productivity and the downward trend overtime, while a higher part-to-fulltime pay differential for skilled workers (a comparative advantage) explains the positive correlation with education. We provide empirical evidence of the comparative advantage using CPS data. We calibrate the model to 1994 and assess its ability to reproduce the 2017 data. There are three exogenous driving forces: productivity, number of children and the proportion of skilled workers. The model accounts for 64.1% of the moonlighting trend for college-educated workers, and 96.7% for high school-educated workers. |
| Keywords: | Macroeconomics, labor supply, multiple job holders, productivity, full-time job, part-time job, comparative advantage, income effect. |
| JEL: | E1 J2 J22 J24 O4 |
| Date: | 2020–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2020-07&r=all |
| By: | Ocampo, José Antonio; Orbegozo, German D.; Villamizar-Villegas, Mauricio |
| Abstract: | We evaluate the effects of the sovereign debt structure by examining various degrees of bond market participation and diversification within different bond maturities and investor type. We use a unique Colombian panel dataset, comprised of all government bond maturities in the hands of public and private institutions during 2006-2018. For identification, we propose an instrumental variable approach, specific to each investor group. We find that an increase in non-residents' market share of a 1 percentage point reduces bond yields by 35% and lowers volatility by 0.8%, relative to their mean values. Alternatively, we see an opposite effect for both pension funds and the banking sector. Finally, we find that market concentration makes local-currency yields more sensitive to global financial shocks. |
| Keywords: | Term structure; Bond market participation; Bond market concentration; Bond holdings |
| JEL: | E43 G01 G11 G15 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:39&r=all |
| By: | John C. Williams |
| Abstract: | Remarks at Economic Club of New York (delivered via videoconference). |
| Keywords: | COVID-19; FOMC; Primary Dealer Credit Facility; Money Market Mutual Fund Liquidity Facility; credit; fiscal policy |
| Date: | 2020–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:87827&r=all |
| By: | Kilindo A A L |
| URL: | http://d.repec.org/n?u=RePEc:aer:wpaper:65&r=all |
| By: | Castro, C; Romero, M; Vélez, S |
| Abstract: | Simulations and empirical studies suggest that incorporating a discontinuous jump process in asset pricing models improve volatility forecasting, pricing of instruments, and hedging positions in a portfolio. In this paper we analyze high frequency market data of Colombian sovereign bonds in order to study the presence or absence of discontinuities in the price generating process. We find that Colombian sovereign debt experiments jumps across all maturities but with different frequencies, in particular, we do not find that long term bonds jump less frequently than short term bonds. Furthermore, bonds with closer maturities cojump in greater magnitude than those with a greater distance between them. Finally, we find significant day-of-the-week effects, as well as an important increase in the jump frequency due to surprises in economic information related to US monetary policy and no effect due to direct monetary policy announcements in Colombia or the US. |
| Keywords: | Jumps, Realized Variance, High Frequency, Preferred habitattheory, Monetary Policy Announcements |
| JEL: | G12 E43 C58 |
| Date: | 2020–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:018098&r=all |
| By: | Bansak, Cynthia (St. Lawrence University); Jiang, Xuan (Ohio State University); Yang, Guanyi (St. Lawrence University) |
| Abstract: | We find a strong positive sibling spillover effect in two-children households in rural China, as measured by an increase in the Chinese and Math test scores of elder siblings when their younger sibling starts school. We use the Chinese Law of Compulsory Education as an exogenous variation in the timing of school enrollment to control for the impact of simultaneous and unobserved out-of-sibship factors. The mechanism for the sibling spillover likely comes from an increase in studying interactions within the sibling pairs. The spillover is prompted by having a younger sister enter school and is the strongest when both children are daughters. However, the son-preference culture emphasized in certain regions negatively offsets the positive sister-led spillover. |
| Keywords: | human capital, peer effect, sibling spillover, school cutoff, son preference, intrahousehold allocation, rural China |
| JEL: | E24 C68 J30 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13127&r=all |
| By: | Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | We generalize a money demand micro-founded model to explain Romanians' recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu. |
| Keywords: | open economy model,money demand,currency substitution,Romania |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01361214&r=all |
| By: | Kidane Asmerom. (Department of statistics, Addis Ababa University, Ethiopia) |
| URL: | http://d.repec.org/n?u=RePEc:aer:wpaper:7&r=all |
| By: | Mogaji, Peter Kehinde |
| Abstract: | Following the monetary integration trends in Europe, there had been the desire for the African Monetary Union and the creation of a unified currency for the African continent. This proposed African common currency would be known as ‘afro’, a single currency for Africa by 2028. The continent of Africa, characterised by the largest number of countries and the largest number of currencies has consequently embarked on a special project for an African monetary integration. The 1991 Abuja treaty set out six stages in the process of achieving a monetary union and a single currency for Africa. This strategy for African monetary integration is based on progressive economic and monetary integration of African economic communities which are regarded as building blocks of Africa. These economic communities are the East African Community (EAC), the Southern African Development Community (SADC) and the Economic Community of the West African States (ECOWAS). Evidences generated from the analyses of the formation of the European Monetary Union (EMU) prompted many conclusions that there were major defects in its establishment as exposed by the Eurozone crisis. Some of these identified optimum currency area (OCA) related design flaws of the Eurozone are: (i) the absence of effective economic governance mechanism; (ii) the retention of banking supervision and resolution at national levels; (iii) the lack of financial back-stops and crisis resolution mechanisms at the union level; and (iv) defects in the design of the Eurozone's common central bank. Clearly, the Eurozone crisis has obviously revealed that banking union and integrated financial market, fiscal union and integrated fiscal framework and political union are all required in a monetary union, for completeness and sustainability. Unfortunately, these are issues not addressed by the OCA theory. From view-points in various debates on the sustainability and completeness of the EMU as well as various revealed faults in the design of Eurozone and the defects inherent in the original optimum currency area (OCA) theory and its application to monetary integration, this paper consequently discusses and highlights banking union, fiscal union and political union as pathways to complete and sustainable monetary integration in Africa. |
| Keywords: | Monetary Integration, European Monetary Union, African Monetary Union, Optimum Currency Area, Eurozone Crisis, Banking Union, Fiscal Union, Political Union |
| JEL: | E6 F36 F45 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99466&r=all |
| By: | Donsimoni, Jean Roch (University of Mainz); Glawion, René (University of Hamburg); Plachter, Bodo (University of Mainz); Wälde, Klaus (University of Mainz) |
| Abstract: | We model the evolution of the number of individuals that are reported to be sick with COVID-19 in Germany. Our theoretical framework builds on a continuous time Markov chain with four states: healthy without infection, sick, healthy after recovery or after infection but without symptoms and dead. Our quantitative solution matches the number of sick individuals up to the most recent observation and ends with a share of sick individuals following from infection rates and sickness probabilities. We employ this framework to study inter alia the expected peak of the number of sick individuals in a scenario without public regulation of social contacts. We also study the effects of public regulations. For all scenarios we report the expected end of the CoV-2 epidemic. |
| Keywords: | Germany, Markov model, spread of infection, SARS-CoV-2, COVID-19, Corona, projection |
| JEL: | I18 E17 C63 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13094&r=all |
| By: | Andrew F. Haughwout; Benjamin Hyman; Matthew Lieber |
| Abstract: | On April 9, the Federal Reserve announced up to $2.3 trillion in new support for the economy in response to the coronavirus pandemic. Among the initiatives is the Municipal Liquidity Facility (MLF), intended to support state and local governments. The details of the facility are described in the term sheet. The state and local sector is a unique but very important part of the economy. This post lays out some of the economics of the sector and the needs that the facility intends to satisfy. |
| Keywords: | state government; local government; COVID-19; municipal government; facility |
| JEL: | E52 H0 |
| Date: | 2020–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87737&r=all |
| By: | Sumru Altug (American University of Beirut); Cem Cakmakli (Koc University); Fabrice Collard (University of Toulouse); Sujoy Mukerji (Queen Mary University); Han Ozsoylev (University of Oxford) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:19-269&r=all |
| By: | Uyanga Byambaa; Beverly Hirtle; Anna Kovner; Matthew Plosser |
| Abstract: | Supervision and regulation are critical tools for the promotion of stability and soundness in the financial sector. In a prior post, we discussed findings from our recent research paper which examines the impact of supervision on bank performance (see earlier post How Does Supervision Affect Banks?). As described in that post, we exploit new supervisory data and develop a novel strategy to estimate the impact of supervision on bank risk taking, earnings, and growth. We find that bank holding companies (BHCs or “banks”) that receive more supervisory attention have less risky loan portfolios, but do not have lower growth or profitability. In this post, we examine the benefits of supervision over time, and especially during banking industry downturns. |
| Keywords: | economic downturn; supervision; bank performance |
| JEL: | E5 G21 G28 |
| Date: | 2020–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87714&r=all |
| By: | Murshed, S.M. |
| Abstract: | The purpose of this paper is to examine the short-run effects of economic sanctions taking the form of restrictions on international trade in goods and services, as well as brakes on international financial flows. A Keynesian disequilibrium, demand driven macroeconomic paradigm is postulated. The target country is envisaged to be part of the global South, the sender country is viewed to be located in the global North, and the sanctions are general rather than targeted at specific firms and sectors. The trade sanctions can take two forms: a diminution of exports to the target country and a reduction in exports from the target nation. Both type of sanctions damage the target country’s economy on impact: the first by lowering aggregate supply in the target country, the latter by worsening its terms of trade. From the viewpoint of the sender country, its economy may benefit from the demand generated by the rent from export restrictions to the targeted economy. Financial sanctions are more unequivocal in their damage to the target economy, they lower the supply of funds or capital in the target nation with adverse consequences for the supply of credit, investment finance, as well as reduced options on how to finance government expenditure. |
| Keywords: | sanctions, macroeconomic effects, trade policy |
| Date: | 2020–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:ems:euriss:126242&r=all |
| By: | Yashiv, Eran (Tel Aviv University) |
| Abstract: | The phenomenon of workers moving from a poor to a rich economy is high on the political agenda. When a worker moves to a richer economy, what is gained by the move? The empirical challenge in giving an answer stems from the difficulty to disentangle income differences from many other determinants. Estimates are potentially biased due to substantial misspecification of the model, when omitting relevant determinants. The paper makes use of a unique data set on Palestinian workers, working locally and in Israel, that allows to isolate the pure effects of income differences with no other relevant factors. It explicitly addresses the question of what workers newly experience in the richer economy (higher productivity), what is taken from the poorer economy (human capital), and their choices in moving (self-selection). Importantly, it encompasses the constraints placed on workers in terms of the human capital skills demanded. The findings show that income differences affecting worker choice are made up of contradictory elements. Consistently with findings in the development accounting literature, productivity differences in favor of the richer economy, due to differences in TFP and in physical capital, are sizeable and operate to raise wages for movers. But lower job task values operate to lower wages for movers, who are offered manual tasks in the rich economy. The latter loss offsets the former gain. The paper emphasizes the idea that tasks are tied to locations. Workers choose a location-wage-task 'pack,' with movers getting low rewards to the skills bundled in their job tasks. |
| Keywords: | movers and stayers, rich and poor economies, pure income effects, job tasks, TFP differentials, human capital differences, self-selection, skill bundle, development accounting |
| JEL: | E24 J24 J31 O15 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13131&r=all |
| By: | Jorge Carrera; Blaise Gnimassoun; Valérie Mignon; Romain Restout |
| Abstract: | This paper conducts an in-depth empirical investigation on the impact of the exchange rate regime (ERR) on real currency misalignments in a panel of 17 Latin American countries over the 1970-2016 period. We consider explicitly the two dimensions of misalignments, size and persistence, and evaluate four different ERR classifications. We also pay attention to cross-sectional dependencies across countries that appear to be important in Latin America, and provide several robustness checks. Our main findings show that, although fixed ERR perform well in limiting the size of misalignments – and in reducing inflation and fiscal deficit – the disequilibria are more persistent. On the contrary, allowing for more flexibility reduces persistence but increases the size of misalignments. Overall, we show that Latin American countries face a crucial trade-off when they have to choose their ERR. |
| Keywords: | Latin American Countries;Exchange Rate Regimes;Currency Misalignments |
| JEL: | F31 C23 E42 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2020-05&r=all |
| By: | Miquel Pellicer (Maynooth University and SALDRU, University of Cape Town); Vimal Ranchhod (School of Economics and SALDRU, University of Cape Town) |
| Abstract: | Most empirical studies on discrimination focus on the differential treatment in the labour market of people of equal productivity. However, if discrimina-tion over the life-cycle affects productivity, then these estimates do not capture the full impact of discrimination on labour market outcomes. We study the cu-mulative effect of discrimination for the (extreme) case of South Africa during apartheid. South Africa's apartheid government implemented a comprehensive system of discrimination against "non-Whites" that covered every major facet of life and was designed to create productivity differentials across race groups. We quantify the cumulative effect of all of these forms of discrimination by esti-mating the causal effect of being classified as White on education, employment and income. Our identification strategy is based on a policy change that privileged ancestry over appearance in the process of racial classification for those born after the 1951 Census. We use census data from 1980, 1991, and 1996, and restrict our sample to Whites and "Coloureds". The data exhibits a discontinuity as well as a change in the trend of racial shares for cohorts born after 1951. Combined, these imply a 6 percentage point lower likelihood of being classified as White for people born 10 years after 1951. Our preferred estimates indicate that being classified as White instead of "Coloured" resulted in a more than threefold increase in income for men. This corresponds to approximately 65% of the difference in mean incomes between the two population groups. Our findings for women are inconclusive. |
| Keywords: | Discrimination, South Africa, Education, Income |
| JEL: | E24 J15 J7 N37 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:may:mayecw:n300-20.pdf&r=all |
| By: | Friederike Rühmann; Sai Aashirvad Konda; Paul Horrocks; Nina Taka |
| Abstract: | The achievement of the Sustainable Development Goals (SDGs) demands unprecedented resources and efforts. Remittances as one of the largest development finance flows are an important source of income for millions of households in developing countries and offer tremendous potential to contribute towards the achievement of Agenda 2030. However, the high cost of sending remittances limits their full potential. The global average cost of sending USD 200 is 6.9% of the remittance. SDG 10 C aims to reduce the cost to less than 3% and to eliminate remittance corridors with cost higher than 5% by 2030. Blockchain technology promises to disintermediate banks, transform the financial landscape and drastically reduce the cost of cross-border transactions, yet there is a need for further evidence on this topic.The OECD Development Co-operation Directorate (DCD) has developed this paper to provide an overview of diverse perspectives on the intersection of blockchain technology and remittances by exploring the opportunities and challenges of this technology for reducing the cost of remittances. The paper identifies several limitations, such as data privacy risks, regulatory uncertainty and last-mile delivery, among others, while investigating whether blockchain technology is the solution to reduce the cost of remittances. |
| JEL: | F24 E58 O19 |
| Date: | 2020–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dcdaaa:73-en&r=all |