Journal Sciences News
Tuberculosis
June 2018
Overoptimism and house price bubbles
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Kim Abildgren, Niels Lyngg
June 2018
Business capital accumulation and the user cost: Is there a heterogeneity bias?
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Serena Fatica Using data from 23 sectors in 10 OECD countries over the period 1984–2007 we show that the homogeneity assumption underlying empirical models of capital accumulation may lead to mis-specification. Thus, we adopt a fully disaggregated approach – by asset types and sectors – to estimate the responsiveness of investment to the tax-adjusted user cost of capital. Once all the sources of heterogeneity are accounted for, we find that capital accumulation is significantly affected by changes in the user cost, although the size of the impact is smaller than the unit benchmark. We do not find robust evidence that the long run substitution elasticities are statistically different across asset types.
June 2018
House prices and macroprudential policy in an estimated DSGE model of New Zealand
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Michael Funke, Robert Kirkby, Petar Mihaylovski We analyse macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. Our estimates show that monetary policy has large spillover effects on house prices, however it has not been a major driver of house prices in New Zealand which have instead been driven by sector-specific shocks. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting they can be used without derailing monetary policy. Efficient policy frontier analysis suggests macroprudential policy is a useful addition to monetary policy, and the two do not need to be coordinated. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8% and that greater forward guidance on their duration would have made them more effective.
June 2018
Boom-and-bust cycles in emerging markets: How important is the exchange rate?
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Pierre L. Siklos This paper examines the macroeconomic implications of exchange rate shocks in a sample of 13 emerging market and 6 advanced economies since the early 1990
June 2018
Quantity–quality trade-off of children and school finance
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Kuzey Yilmaz To understand income inequality and intergenerational mobility of income, it is essential to account for the fertility differential between the poor and the rich because it affects the human capital investment through the quantity–quality trade-off of children. We develop a dynamic general equilibrium in which parents choose the quantity of children, transfer a preschool ability to their children, determine the quality of children by choosing private expenditures on basic education (in addition to public expenditures), and leave a bequest that could be used to finance college education. We find that incorporating fertility behavior, especially differential fertility is crucial to capture human capital formation in the U.S. economy. We also analyze the impact of basic education subsidies and college subsidies on welfare, inequality, and intergenerational mobility.
June 2018
Public investment, debt, and welfare: A quantitative analysis
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Santanu Chatterjee, John Gibson, Felix Rioja In this paper, we examine the relationship between infrastructure investment and economic welfare in the context of a heterogeneous agent, incomplete-markets economy. Using a quantitative model to match the key aggregate and distributional features of the U.S. economy over the period 1990–2015, we show that the welfare-maximizing share of public investment in GDP depends critically on whether one internalizes the transition path between stationary equilibria or not. When welfare changes are evaluated by only comparing long-run stationary equilibria, the model implies that the government should increase infrastructure investment above its average share of 4 percent of GDP in the data. However, once the transition path and short-run dynamics are internalized, welfare-maximization generates an intertemporal trade-off in the path of infrastructure spending: a short-run increase significantly above its observed share in the data, but a long-run decline below this share to satisfy the government’s budget constraint.
June 2018
Tax efficiency, seigniorage and Central Bank Conservativeness
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Montserrat Ferr
June 2018
Home production, balanced-budget taxation and economic (in)stability
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Jianpo Xue, Chong K. Yip This paper examines the instability property of balanced-budget taxation on factor income and consumption in a two-sector real business cycle model with home production. We show that the presence of home production, which is a nontaxed sector, reinforces the intratemporal and intertemporal substitution effects of balanced-budget rules. As a result, it strengthens the destabilization effect of factor income taxes and weakens the stabilization effect of consumption taxes. Moreover, our calibration shows that the number of OECD countries’ tax-rate combinations that fall into the instability region rises when home goods account for a larger share of aggregate consumption, and hence persistent cycles can easily occur following a fundamental shock or a sunspot shock.
June 2018
Reassessing Taylor rules using improved housing rent data
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Brent W. Ambrose, N. Edward Coulson, Jiro Yoshida There is a debate whether the federal funds rate deviated from the Taylor rule. We present evidence that standard inflation measures do not reflect the contemporaneous state of housing rents, which are a large part of price indexes. Using a new housing rent index (RRI) developed by Ambrose et al. (2015), we compute the RRI-based Taylor rule for the period from 2000 to 2010. The modified Taylor rule indicates that seemingly large deviations are better understood as delays due to the stale information regarding housing rents. It also provides a justification for Quantitative Easing and a better alternative to other versions of Taylor rules.
June 2018
Measuring the size of the shadow economy using a dynamic general equilibrium model with trends
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Mario Solis-Garcia, Yingtong Xie We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.
June 2018
Trade and productivity: The family connection redux
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Klaus Prettner, Holger Strulik We investigate the effects of human capital accumulation and declining fertility on international trade by integrating a micro-founded education and fertility decision of households into a model of trade with firm heterogeneity. The theory implies that the export share of a country increases with the education level of its population and decreases with fertility. These implications explain the empirically observable relations between the birth rate, eduction, and the export share in OECD countries from 1960 to 2010.
June 2018
Labor mobility, structural change and economic growth
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Jaime Alonso-Carrera, Xavier Raurich This paper develops a two-sector growth model in which the process of structural change in the sectoral composition of employment and GDP is jointly determined by income effects, derived from non-homothetic preferences, and by a substitution mechanism derived from a labor mobility cost. This cost, paid by workers moving to another sector, generates a sectoral wage gap that limits structural change. Our model can explain the following patterns of development of the US economy throughout the period 1880-2000: (i) balanced growth of the aggregate variables in the second half of the last century; (ii) structural change in the sectoral composition of employment between agricultural and non-agricultural sectors; (iii) structural change process in the sectoral composition of GDP between these sectors; and (iv) wage convergence between the two sectors. We outline that in the absence of wage gaps the model is not able to jointly explain the process of structural change in the sectoral composition of both GDP and employment. This cost reduces the Possibilities Production Frontier (PPF) by constraining the sectoral allocation of production factors. This implies a loss of GDP which amounts to over 30% of the GDP throughout initial periods according to the calibrated model. During the transition, the loss of GDP decreases and eventually vanishes. Thus, the elimination of this technological constraint explains part of the increase in the GDP. Additionally, this study points out that the aforementioned technological constraint introduces a mechanism through which cross-country differences in sectoral composition may account for cross-country income differences.
Available online 18 May 2018
Effects of monetary policy shocks on exchange rate in small open Economies
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Soyoung Kim, Kuntae Lim This study empirically investigates the effects of monetary policy shocks on exchange rates in four small open economies (United Kingdom, Canada, Sweden, and Australia) by using VAR models in which sign restrictions on impulse responses are imposed to identify monetary policy shocks. The main empirical findings are as follows. (1) A contractionary monetary policy leads to significant exchange rate appreciation. (2) The delay in overshooting is relatively short, at best six months. (3) The deviation from the UIP condition is relatively small, although significant at short horizons in a few cases. To obtain results without strong puzzles, constructing an empirical model that reflects the features of the small open economy and estimates the model for the recent inflation-targeting period during which monetary policy operating procedure does not change substantially are important.
Available online 18 May 2018
Neoclassical Inequality
Publication date: Available online 18 May 2018
Source:Journal of Macroeconomics Author(s): Daniel R. Carroll, Eric R. Young In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be substantially greater than one in order for income inequality be higher with zero growth, in fact higher than nearly all estimates. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.
Available online 18 May 2018
Effects of International Trade and Intellectual Property Rights on Innovation in China
Publication date: Available online 18 May 2018
Source:Journal of Macroeconomics Author(s): Angus C. Chu, Haichao Fan, Guobing Shen, Xun Zhang In this study, we develop an open-economy R&D-based growth model with two intermediate production sectors that use domestic and foreign inputs, respectively. We find that strengthening intellectual property rights (IPR) has a positive effect on innovation in the sector that uses domestic inputs but both positive and negative effects on innovation in the sector that uses foreign inputs. We test and confirm these theoretical results using an empirical analysis of matching samples that combine Chinese provincial IPR data with patent database, industrial enterprises database and customs database of China.
Available online 16 May 2018
Fiscal foresight: do expectations have cross-border effects?
Publication date: Available online 18 May 2018
Source:Journal of Macroeconomics Author(s): Simone Romano This paper estimates the cross-border effects of U.S. fiscal shocks on four main trading partners within a two-country Bayesian VAR framework. Using an identification strategy which differentiates between expected and unexpected government spending shocks, it provides evidence in support of the hypothesis that expectations alter fiscal policy transmission at both national and international level. While an unexpected fiscal stimulus yields negligible cross-border effects, the anticipation of an increase in government spending produces sizable positive spillovers in the medium run.
Available online 16 May 2018
Investment Specific Technology, News, Sentiment, and Fluctuations: Evidence from Nowcast Data
Publication date: Available online 16 May 2018
Source:Journal of Macroeconomics Author(s): Xiaohan Ma Investment specific technology is an important driver of the U.S. business cycles. In this paper, I employ nowcast data and the forecast error variance decomposition method to empirically assess the role of investment specific technology surprise shocks, news shocks and sentiment shocks separately. The surprise shock represents unanticipated innovations to the technology; the news shock captures the (correct) expectation of future technological changes; the sentiment shock is orthogonal to the identified surprise and news shocks, which maximizes the short run forecast error variance of nowcast of investment. The results suggest that the sentiment shock accounts for a substantial portion of fluctuations in output and investment in the short run. In the medium run, the news shock is increasingly important. The surprise innovation plays a very small role in the explanation of economic dynamics. These findings underline the empirical contribution of investment specific news and sentiment shocks to business cycle fluctuations.
Available online 10 May 2018
Bivariate jointness measures in Bayesian Model Averaging: Solving the conundrum
Publication date: Available online 16 May 2018
Source:Journal of Macroeconomics Author(s): Paul Hofmarcher, Jesus Crespo Cuaresma, Bettina Gr
Available online 9 May 2018
Exchange Rate Regimes, Devaluations and Growth Collapses
Publication date: Available online 10 May 2018
Source:Journal of Macroeconomics Author(s): Michael Bleaney, Sweta Saxena, Lin Yin The loss of output in major recessions tends to be permanent. Using IMF de facto exchange rate regime classifications over the period 1980 to 2012 for up to 193 countries, it is shown that growth collapses are more frequent under less flexible exchange rate regimes, and particularly hard pegs. Amongst intermediate regimes, those with recent devaluations are less likely to experience a growth collapse, which confirms the role of exchange rate adjustment in reducing the output effects of a negative shock. Our findings are robust to the marked shift in the pattern of growth collapses after the global financial crisis.
Available online 26 April 2018
Human Capital, Public Debt, and Economic Growth: A Political Economy Analysis
Publication date: Available online 9 May 2018
Source:Journal of Macroeconomics Author(s): Tetsuo Ono, Yuki Uchida This study considers the politics of public education policy in an overlapping-generations model with physical and human capital accumulation. In particular, this study examines how debt and tax financing differ in terms of growth and welfare across generations, as well as which fiscal stance voters support. The analysis shows that the growth rate in debt financing is lower than that in tax financing, and that debt financing creates a tradeoff between the present and future generations. The analysis also shows that debt financing attains slower economic growth than that realized by the choice of a social planner who cares about the welfare of all generations.
Available online 24 April 2018
The Dynamic Effects of Public Expenditure Shocks in the United States
Publication date: Available online 26 April 2018
Source:Journal of Macroeconomics Author(s): Susana P
Available online 16 April 2018
Natural rates across the Atlantic
Publication date: Available online 24 April 2018
Source:Journal of Macroeconomics Author(s): Stefano Neri, Andrea Gerali A closed-economy medium-scale model is estimated for the United States and the euro-area to assess the current level of the natural rate of interest and shed light on its drivers over the last decades. The model features a rich set of shocks that bear some connection with the explanations put forward in the literature to explain the secular downward trend in interest rates. The analysis shows that the natural rate has declined over the past decades, contributing to lowering nominal and real rates. Risk premium shocks, short-cut for changes in agents’ preference for safe assets, have been the main driver in the euro area. In the United States, shocks to the efficiency of investment, which may capture the functioning of the financial sector, and to the risk premium have played a major role. These differences across the two economies underscore the importance of adopting a structural model with a rich stochastic structure.
Available online 14 April 2018
Dynamic monetary equilibrium with a Non-Observed Economy and Shapley and Shubik’s price mechanism
Publication date: Available online 16 April 2018
Source:Journal of Macroeconomics Author(s): Labib Shami We build a general equilibrium model with inside and outside money, heterogeneous tax-evading households, a government and a central bank to demonstrate the dynamic nature of the relationship between inflation rates as a monetary policy and the size of the Non-Observed Economy. Using Shapley and Shubik’s (1977) price mechanism, we show that fiat money has a positive value in a unique monetary equilibrium where formal and informal markets coexist. In this model, with forward-looking agents and a government that has long term budget constraint, inflation is not only a tax but is also a debt, revealing yet another interpretation of the Ricardian effect. The model is capable of producing both positive and negative relationships between the change in the inflation rate and the size of the Non-Observed Economy, both over time and across countries. In this setting, the Non-Observed Economy plays a role of a “friction”, allowing monetary policy to have real effects, as commodity allocation between government and private consumption depends on the inflation path.
Available online 3 April 2018
New Evidence on the Evolution of the Anchoring of Inflation Expectations
Publication date: Available online 14 April 2018
Source:Journal of Macroeconomics Author(s): Ines Buono, Sara Formai We investigate the degree of anchoring in inflation expectations for different advanced economies using data from professional forecasters’ surveys. We define expectations as anchored when movements in short-run expectations do not trigger movements in expectations at longer horizons. Using time-varying parameter regressions, we provide evidence that anchoring has varied noticeably across economies and over time. In particular, we find that after the financial crisis expectations have been firmly anchored at the target in the United States and, to a lesser extent, in the United Kingdom. In the euro area, expectations have been de-anchored shortly after the crisis and again starting from 2014. In Japan de-anchoring is more pervasive all over the sample period.
March 2018
Central bank intervention, public debt and interest rate target zones
Publication date: Available online 3 April 2018
Source:Journal of Macroeconomics Author(s): Pompeo Della Posta The euro area crisis has been characterized by speculative attacks reflecting the market fear that some high indebted countries could go bankrupt. What is puzzling, however, is that non-euro area countries with an equally large – and in some cases even larger - public debt-to-GDP ratios have not been subject to attacks. This fact, together with the convex non-linear behavior exhibited by interest rates have been explained by observing that euro area countries could not rely on a lender of last resort, and this made possible the occurrence of self-fulfilling speculative attacks. The model proposed in this article applies the target zones methodology relative to exchange rates, developed in the late 1980s-early 1990s, to the case of the interest rate, given that public debt stability will only be assured if the former does not exceed a given upper bound. The novelty of the paper is that, by considering the presence of a public debt demand stochastic shock - that may originate from different sources - it is possible to endogenize the determinants of the credibility of the interest rate target zone and, as a result, of public debt stability, something that in a previous paper, still based on the idea of interest rate target zones, had to be taken exogenously. Public debt stability, then, is shown to depend on the potential liquidity that the central bank can create thanks to its role of lender of last resort. Full/partial credibility is obtained when such liquidity is expected to be sufficient/insufficient to absorb completely the demand shock. The expected absence of liquidity determines the non-credibility of the interest rate target, while the expectation of a public debt increase produces a destabilizing non-credibility determining the convex interest rate non-linearity that characterized the euro area crisis.
March 2018
Editorial Board
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55

March 2018
The effect of public debt on growth and welfare under the golden rule of public finance
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Mitsuru Ueshina This study analyzes an endogenous growth model with public capital and public debt under the “golden rule of public finance” which prohibits the government from issuing bonds for nonproductive purposes. We assume that public investment is fully financed by fiscal deficit in our model analyzing the effects of public debt on the economy. Our results under the fiscal rule can be summarized as follows. First, the model shows two steady states exist: one is unstable with zero growth and the other is saddle-path stable with positive growth. The economy may not converge to the stable steady state if the public capital relative to public debt is not sufficient at the initial point. Second, the model shows that the growth maximizing tax rate exceeds the welfare-maximizing tax rate in considering transitional dynamics, but the short-term effect can differ from that of a model with a balanced budget rule.
March 2018
The core
March 2018
Euro area structural reforms in times of a global crisis
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Sandra Gomes The global financial crisis and the sovereign debt crisis brought back to the policy debate the issue of the lower bound (LB) on interest rates and the policy options when this is a binding constraint. The paper looks at structural reforms as a way to provide economic stimulus for an economy at the LB. We focus on the euro area and carry out a comprehensive analysis within a multi-country structural model of the euro area within the world. Main results show structural reforms have positive short-run effects that reduce the size of a recession and in some cases can drive the euro area out of the LB. The labor reform accentuates deflation which implies that interest rates remain at the LB for the same number of periods, while the services reform pushes the euro area out of the LB if implemented in the largest part of the union. The latter result hinges on the assumption of a gradual implementation of reforms. Reforms have significantly different effects across different types of households and thus the share of these households is important in the transmission. Unilateral reforms in a large bloc have positive spillover effects within the euro area. Unilateral reforms in a small bloc are deflationary but the small size of the bloc leads to very limited impact of national developments on monetary policy.
March 2018
The impact of ECB monetary policy surprises on the German stock market
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): J
March 2018
The missing spillover of base expansion into monetary aggregates: Is there a puzzle?
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Ivo J.M. Arnold, Beau Soederhuizen The seeming impotence of monetary base expansion to influence money growth during the global financial crisis and the European sovereign debt crisis, can be regarded as a puzzle. A possible explanation is that central banks have used unconventional monetary policies to pursue dual objectives: to stabilize the financial system and to stimulate the economy. While achieving the latter objective may result in a positive spillover of base money into money growth, this does not necessarily hold for the former objective. This paper aims to disentangle these effects by estimating a state space model in which the monetary base is adjusted for distortions arising from the instability in financial markets. We find that stress in money and bond markets, measured by various indicators, has significantly affected the relationship between base growth and money growth in the EA, but not in the US.
March 2018
Keeping up with the Zhangs: Relative income and wealth, and household saving behavior
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Noam Gruber Research has shown high income households to have high saving rates. Using detailed Chinese household survey data, this study demonstrates that saving rates are determined by relative, rather than absolute, income level. Specifically, households with higher than the average income in their locality save a larger fraction of their income. To explain this finding, this study proposes a utility function that incorporates both relative consumption and relative wealth. This function not only generates higher saving rates by relatively high income households, but also predicts the observed correlation between economic growth and the aggregate saving rate on the national level.
March 2018
Business cycles, informal economy, and interest rates in emerging countries
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Jaroslav Horvath This paper recognizes the importance of a large informal economy and interest rate fluctuations for business cycles in emerging countries. I document (1) a positive relationship between the relative volatility of consumption to output and the size of the informal economy, and (2) countercyclical interest rates in emerging countries. I show that in a two-sector real business cycle model of a small open economy with a poorly measured informal sector, an increase in country interest rate generates a contraction in output, consumption, investment, hours, an improvement in trade balance-to-output ratio, and an expansion of informal sector.
March 2018
Monetary policy shocks, inflation persistence, and long memory
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Yuliya Lovcha, Alejandro Perez-Laborda Structural VAR studies on the effects of monetary policy actions do not usually take into consideration the observed persistence of inflation and many of the other variables included in the models. In this paper, we account for this issue by analyzing the effects of the monetary policy shock in a structural fractionally integrated VAR. Our main findings are: a) there is overwhelming evidence of long memory, with the traditional framework, decisively rejected by the data; b) allowing for long memory has strong implications for the analysis of the responses of the variables to non-systematic policy actions; c) typical VAR specifications lead to a misleading assessment of the importance of the monetary policy shock; d) the long memory properties of inflation remain stable across the usual sample splits in the literature, consistent with the view that long memory is an intrinsic property of inflation data arising in the construction of the price indexes. This result is robust to alternative specifications of the model.
March 2018
What drives economic policy uncertainty in the long and short runs: European and U.S. evidence over several decades
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): John V. Duca, Jason L. Saving Economic policy uncertainty (EPU) has increased markedly in recent years in the U.S. and Europe, and some have posited a link between this phenomenon and subpar economic growth in advanced economies (see Baker et al., 2016). But methodological and data concerns have thus far raised doubts about whether EPU contains marginal and exogenous information about other economic phenomena. Our work analyzes the impact on EPU of several possibly endogenous variables, such as inflation and unemployment rates in western countries where EPU is measured. We also consider longer-term technological factors, such as media fragmentation, which, by undermining political consensus, may indirectly elevate EPU. We find that about 40 percent of EPU movements can be explained by long- and short-run movements in these determinants, which is consistent with limited evidence that de-trended movements in EPU may contain marginal information about GDP growth and other macro variables.
March 2018
The effectiveness of central bank forward guidance under inflation and price-level targeting
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Stephen J. Cole This paper examines the effectiveness of central bank forward guidance under inflation and price-level targeting monetary policies. The results show that the beneficial effects of forward guidance increase if a central bank pursues price-level targeting instead of inflation targeting. Output and inflation respond more favorably to forward guidance with price-level targeting than inflation targeting. A monetary policy rule that aggressively reacts to inflation and includes interest rate inertia narrows the performance gap between the two policy regimes. However, forward guidance with price-level targeting is still preferred to forward guidance with inflation targeting after performing multiple robustness checks.
March 2018
Comparing budget repair measures for a small open economy with growing debt
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): George Kudrna, Chung Tran We quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using an overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. The adverse effects on wellbeing of current generations highlight political constraints when implementing a fiscal consolidation plan. However, after compensating current generations for all welfare losses, there is still an overall efficiency gain. This implies possibilities to devise a fiscal consolidation plan supported by a compensation scheme to improve wellbeing of future generations.
March 2018
Is the labor wedge due to rigid wages? Evidence from the self-employed
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Trevor S. Gallen A central goal of labor economics is explaining cyclical variation in hours worked. Procyclical hours can always be explained in a market clearing model with a residual tax wedge, the “labor wedge.” Convincing progress has been made in reducing the cyclical volatility in the labor wedge and therefore explaining movements in hours worked by amplifying technology shocks with endogenously rigid wages [Hall, R. E., 2005. Employment Fluctuations with Equilibrium Wage Stickiness. American Economic Review 95 (1), 50–65.],[Shimer, R., 2010. Labor Markets and Business Cycles. Number 9217 in Economics Books, Princeton University Press.], and rigid wages in general. This paper demonstrates that the cyclical component of labor hours for the self-employed, who are not vulnerable to such frictions, is of comparable cyclicality and volatility as the cyclical component of labor hours for wage and salary workers, even conditioning on wages, consumption, and occupation-industry composition. This finding suggests that explaining the labor hours of the self-employed presents a new test for amplification mechanisms.
March 2018
Dynamic analysis of bureaucratic quality and occupational choice
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Kiyoka Akimoto This paper analyzes the interdependency between bureaucratic quality and economic development. Capital accumulation changes bureaucratic quality through occupational choice in two cases. In the first case, the bureaucratic quality improves through economic development, and, in the second case, bureaucratic quality worsens or remains low. In both cases, good quality of bureaucracy cannot be realized without economic development. Workers and bureaucrats earn a higher income under a low-quality bureaucracy. A change in quality from low to high expands income inequality between unskilled and skilled individuals and contracts inequality among skilled individuals.
March 2018
Financial development and the bank lending channel in developing countries
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Sergio Sanfilippo-Azofra, Bego
March 2018
Downpayment, mobility and default: A welfare analysis
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Ayman Mnasri In this paper, I study the impact of the relaxation of downpayment requirements on home-ownership and default risk in the context of a static spatial life cycle model. Given its quantitative success in matching the U.S. home-ownership curve, my model represents a reasonable benchmark for assessing the efficiency of mortgage default prevention policies. I find that both income and geographical mobility are the main trigger factors for default decisions. In fact, households with a higher mobility (i.e. young households) rate are more likely to default. According to the welfare analysis, I suggest that policymakers include a minimum downpayment requirement of 9.5% in the new definition of the Qualified Residential Mortgage (QRM). This number should, however, be viewed with some caution, since I focus on a steady-state economy, in which house prices are constant. In fact, house prices represent an important factor influencing the default rate. Potentially, the optimal minimum downpayment requirement should be set at a higher value than 9.5%.
March 2018
On the fiscal strategies of escaping poverty-environment traps towards sustainable growth
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Nguyen Thang Dao, Ottmar Edenhofer We develop an overlapping generations (OLG) model with two intermediate inputs, clean and dirty, and one final output in order to consider the interplay between the environment, life expectancy, and capital accumulation, and to consider the possibilities of reallocating capital between the clean and dirty sectors to improve social welfare. We show that the multiple distinct steady states, (and even the continuum of steady state), may occur in a competitive economy. Hence, an economy may fall into a poverty-environment trap that is characterized by low environmental quality, low life expectancy, and therefore, low per capita physical capital, while the others may converge to the opposite steady state. The competitive steady states differ from the first-best steady state in the benevolent social planner’s viewpoint not only because of imperfect altruism between generations in the competitive economy, but also because individuals cannot internalize the effects of their savings (capital accumulation) and capital allocation on environmental quality through producing dirty intermediate inputs, whereas the social planner can. So we propose fiscal strategies towards social planner’s steady state. These fiscal strategies, which are combination of traditional Pigouvian taxes and capital income tax implemented for transition phase are quite new compared to the existing related literature. Although we focus on the transition phase, the proposed taxes are stationary. They include: (i) a set of tax and subsidy imposed on the production of dirty and clean intermediate inputs to improve environmental quality, and therefore, life expectancy and capital accumulation, in order to guarantee that an economy that is locked in a poverty-environment trapcan escape such the stagnation; and (ii) a set of taxes (subsidies) imposed on the production of intermediate inputs and capital income in order to decentralize the transition to the first-best steady state as a competitive outcome.
March 2018
Labor force participation, wage rigidities, and inflation
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Francesco Nucci, Marianna Riggi The fall in the US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are also shown to account for these patterns, with the participation rate being procyclical in the US since the inception of the crisis and countercyclical in the euro area. We rationalize these diverging developments by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching framework. We show that the “added worker” effect might outweigh the “discouragement effect” if real wage rigidities are allowed for and/or habit in consumers’ preferences is sufficiently strong. We then draw the implications of variable labor force participation for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on inflation stemming from the lack of downward adjustment of real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation associated with wage rigidities.
March 2018
Growth effects of inequality and redistribution: What are the transmission channels?
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Klaus Gr
March 2018
The decline in the predictive power of the US term spread: A structural interpretation
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Joseph Morell Numerous studies have found the term spread to be a significant predictor of future real output growth. However, in the case of the US, the term spread’s predictive power has diminished from the mid-1980s till present. This paper provides new evidence to the debate on why the term spread leads output growth. We do this by structurally accounting for the decline in the predictive power of the US term spread. Our findings indicate that it is changes to the composition of shocks hitting the US economy which has caused the term spread, through the endogenous monetary policy response, to be a less reliable indicator of future output growth in recent decades.
Available online 31 January 2018
Leave the volatility fund alone: Principles for managing oil wealth
Publication date: March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Samuel Wills How should capital-scarce countries manage their volatile oil revenues? Existing literature is conflicted: recommending both to invest them at home, and save them in sovereign wealth funds abroad. I reconcile these views by combining a stochastic model of precautionary savings with a deterministic model of a capital-scarce resource exporter. I show that both developed and developing countries should build an offshore Volatility Fund, but refrain from depleting it when oil prices fall because it cannot be known when, or if, they will rise again. Instead, consumption should adjust and only the interest on the fund should be consumed. To do this I develop a parsimonious framework that nests a variety of existing results as special cases, which I present in four principles: for capital-abundant countries, i) smooth consumption using a Future Generations Fund, and ii) build a Volatility Fund quickly, then leave it alone; and for capital-scarce countries, iii) consume, invest and deleverage, and iv) invest part of the Volatility Fund domestically, then leave it alone.
Available online 12 January 2018
Fiscal multipliers across the credit cycle
Publication date: Available online 31 January 2018
Source:Journal of Macroeconomics Author(s): Mih
Available online 11 January 2018
Exchange Rate Targeting in the Presence of Foreign Debt Obligations
Publication date: Available online 12 January 2018
Source:Journal of Macroeconomics Author(s): James Staveley-O’Carroll, Olena M. Staveley-O’Carroll We study the impact of foreign debt on the optimal degree of trade-off between the three open economy objectives of the central bank—the desire to smooth exchange rate fluctuations to promote consumption risk sharing, the need for exchange rate flexibility to facilitate expenditure-switching in the face of sticky prices, and the incentive to tilt international prices so as to lower the labor effort of domestic households (terms-of-trade externality)—in a two-country productivity-shock-driven DSGE model with incomplete asset markets and deviations from purchasing power parity. We find that high levels of net foreign debt call for a policy with a significant degree of exchange rate management, which can constrain the extent of otherwise inefficient cross-border wealth transfers that arise due to debt valuation and risk premium effects. In particular, the central bank can improve consumer welfare by up to 0.1 percent of steady state consumption by responding to exchange rate fluctuations when domestic debt-to-GDP ratio reaches 100 percent. We also find that the ranking of optimal policy rules depends on the elasticity of import-export substitution. When home and foreign goods are complements, the responsiveness of the real exchange to shocks is muted, in turn mitigating the excessive cross-country wealth transfer associated with the debt valuation effect. In this case, CPI targeting outperforms the nominal peg at high levels of debt by improving international risk sharing.
Available online 11 January 2018
The Macroeconomics of the Minimum Wage
Publication date: Available online 11 January 2018
Source:Journal of Macroeconomics Author(s): Radek

Credit Crunches, Individual Heterogeneity and the Labor Wedge
Publication date: Available online 11 January 2018
Source:Journal of Macroeconomics Author(s): Lini Zhang Standard neoclassical theory suggests that the marginal product of labor (MPL) should be equal to the marginal rate of substitution between consumption and leisure (MRS). Yet this is not the case in the data. Understanding the measured discrepancy between the MPL and the MRS, commonly referred as the labor wedge, is important to comprehend the limitations of economic models and thereafter improve them. The labor wedge has increased significantly during the Great Recession, but the mechanism of its variation in the credit crunch has not been well understood. This paper fills in this gap by studying the labor wedge in a DSGE model with collateral borrowing constraints. I find that a credit crunch can affect the labor wedge through a mechanism different from that of an exogenous TFP shock when there are endogenous entry and exit of production. With entry and exit, the tightening of the collateral constraints can cause the gap between the real wage and the MRS to increase, but the exogenous TFP shock does not have this mechanism. As a result, the labor wedge has higher increases in the credit crunch. When entry and exit are shut down, the labor wedge would have much smaller increases in the credit crunch.
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