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Tuberculosis
June 2018
Overoptimism and house price bubbles
Publication date: June 2018
Source:Journal of Macroeconomics, Volume 56 Author(s): Kim Abildgren, Niels Lyngg
3 March 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.
3 March 2018
The effect of public debt on growth and welfare under the golden rule of public finance
Publication date: 3 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.
3 March 2018
The core
3 March 2018
Euro area structural reforms in times of a global crisis
Publication date: 3 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.
3 March 2018
The impact of ECB monetary policy surprises on the German stock market
Publication date: 3 March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): J
3 March 2018
The missing spillover of base expansion into monetary aggregates: Is there a puzzle?
Publication date: 3 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.
3 March 2018
Keeping up with the Zhangs: Relative income and wealth, and household saving behavior
Publication date: 3 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.
3 March 2018
Business cycles, informal economy, and interest rates in emerging countries
Publication date: 3 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.
3 March 2018
Monetary policy shocks, inflation persistence, and long memory
Publication date: 3 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.
3 March 2018
What drives economic policy uncertainty in the long and short runs: European and U.S. evidence over several decades
Publication date: 3 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.
3 March 2018
The effectiveness of central bank forward guidance under inflation and price-level targeting
Publication date: 3 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.
3 March 2018
Comparing budget repair measures for a small open economy with growing debt
Publication date: 3 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.
3 March 2018
Is the labor wedge due to rigid wages? Evidence from the self-employed
Publication date: 3 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.
3 March 2018
Dynamic analysis of bureaucratic quality and occupational choice
Publication date: 3 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.
3 March 2018
Financial development and the bank lending channel in developing countries
Publication date: 3 March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Sergio Sanfilippo-Azofra, Bego
3 March 2018
Downpayment, mobility and default: A welfare analysis
Publication date: 3 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%.
3 March 2018
On the fiscal strategies of escaping poverty-environment traps towards sustainable growth
Publication date: 3 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.
3 March 2018
Labor force participation, wage rigidities, and inflation
Publication date: 3 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.
3 March 2018
Growth effects of inequality and redistribution: What are the transmission channels?
Publication date: 3 March 2018
Source:Journal of Macroeconomics, Volume 55 Author(s): Klaus Gr
3 March 2018
The decline in the predictive power of the US term spread: A structural interpretation
Publication date: 3 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 12 January 2018
Leave the volatility fund alone: Principles for managing oil wealth
Publication date: 3 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 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
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.
Available online 5 January 2018
The Macroeconomics of the Minimum Wage
Publication date: Available online 11 January 2018
Source:Journal of Macroeconomics Author(s): Radek
Available online 16 December 2017
Discretionary Policy in a Small Open Economy: Exchange Rate Regimes and Multiple Equilibria
Publication date: Available online 5 January 2018
Source:Journal of Macroeconomics Author(s): Christoph Himmels, Tatiana Kirsanova We study a Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We analyze inflation and exchange rate targeting regimes and demonstrate that both cases may result in multiple equilibria. These equilibria feature qualitatively and quantitatively different economic dynamics following the same shock. The model can help us to understand sudden changes in the interest rate and exchange rate volatility in ‘tranquil’ and ‘volatile’ times under a fully credible ‘soft peg’ of the nominal exchange rate.
December 2017
Medium-Term Fiscal Multipliers during Protracted Economic Contractions
Publication date: Available online 16 December 2017
Source:Journal of Macroeconomics Author(s): Salvatore Dell'Erba, Ksenia Koloskova, Marcos Poplawski-Ribeiro The paper examines the consequences of fiscal consolidation in times of persistently low growth and high unemployment by estimating medium-term fiscal multipliers during protracted economic contractions in a sample of 17 OECD countries. Based on Jord
December 2017
Editorial Board
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B

December 2017
Editorial Board
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A

December 2017
Banking in macroeconomic theory and policy
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Enzo Dia, David VanHoose This special issue, “Banking in Macroeconomic Theory and Policy,” explores a problem that has occupied to varying degrees several recent generations of economists: identifying and integrating the appropriate role of a banking sector within a policy-relevant analytical framework of macroeconomic analysis. This introductory article tries to provide a context for the fascinating contributions to this issue. It reviews efforts to apply developments in bank modeling to augmenting macroeconomic models during the 1960s through 1980s, theoretical and empirical elements that led to diminished emphasis on incorporating banking into analytical macroeconomic frameworks between the 1990s and the 2007–2009 financial crisis, and recently renewed work to integrate banking sectors into modern macroeconomic models. The paper concludes by reviewing briefly the contributions contained in this special issue.
December 2017
Guest Editors’ Introduction: Monetary rules for a post-crisis world
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): George Selgin, Scott Sumner
December 2017
Unexpected loan losses and bank capital in an estimated DSGE model of the euro area
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Nikolay Hristov, Oliver H
December 2017
Remarks on monetary rules for a post-crisis World
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): John B. Taylor
December 2017
Financial shocks, financial stability, and optimal Taylor rules
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Fabio Verona, Manuel M.F. Martins, In
December 2017
Economic ideas, the monetary order and the uneasy case for policy rules
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): David Laidler The problems posed by monetary policy cannot be successfully addressed by legislating enduring policy rules. With the passage of time, economic understanding does not systematically converge ever more closely on a “true” model of the economy, a process which is now sufficiently far along that our current ideas can form the basis for designing such measures. Rather, ideas evolve unsteadily and unpredictably, and disagreement about them is routine. They influence the behaviour of the economy and they are influenced by it as they develop, requiring policy principles to adapt as well. Monetary policy problems thus cannot be solved once and for all, but must be coped with continuously.
December 2017
Interest on reserves, settlement, and the effectiveness of monetary policy
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Joshua R. Hendrickson Over the last several years, the Federal Reserve has conducted a series of large scale asset purchases. The effectiveness of these purchases is dependent on the monetary transmission mechanism. Former Federal Reserve chairman Ben Bernanke argued that large scale asset purchases are effective because they induce portfolio reallocations that ultimately lead to changes in economic activity. Despite these claims, a large fraction of the expansion of the monetary base is held as excess reserves by commercial banks. Concurrent with the large scale asset purchases, the Federal Reserve began paying interest on reserves and enacted changes in its Payment System Risk policy. In this paper, I estimate the effect of the payment of interest on reserves (as well as other payment policy changes) on the demand for daylight overdrafts through Fedwire. Since Fedwire provides overdrafts at a fixed price, any fluctuation in the quantity of overdrafts is a change in demand. A reduction in overdrafts corresponds with an increase in the demand for reserves. I show that the payment of interest on reserves has had a negative and statistically significant effect on daylight overdrafts. Furthermore, I interpret these results in light of recent theoretical work. I argue that by paying an interest rate on excess reserves that is higher than comparable short term rates, the Federal Reserve likely hindered the portfolio reallocation channel outlined by Bernanke. Thus, the payment of interest on reserves increased payment processing efficiency, potentially at the expense of limiting the ability of monetary policy to influence economic activity.
December 2017
Rules versus discretion in monetary policy historically contemplated
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): David Glasner Monetary policy rules are attempts to cope with the implications of having a medium of exchange whose value exceeds its cost of production. Two classes of monetary rules can be identified: (1) price rules that target the value of money in terms of a real commodity, e.g., gold, or in terms of some index of prices, and (2) quantity rules that target the quantity of money in circulation. Historically, price rules, e.g. the gold standard, have predominated, but the Bank Charter Act of 1844 imposed a quantity rule as an adjunct to the gold standard, because the gold standard had performed unsatisfactorily after being restored in Britain at the close of the Napoleonic Wars. A quantity rule was not proposed independently of a price rule until Henry Simons proposed a constant money supply consisting of government-issued fiat currency and deposits issued by banks operating on a 100% reserve basis. Simons argued that such a plan would be ideal if it could be implemented because it would deprive the monetary authority of any discretionary decision-making power. Nevertheless, Simons concluded that such a plan was impractical and supported a price rule to stabilize the price level. Simons's student Milton Friedman revived Simons's argument against discretion and modified Simons's plan for 100% reserve banking and a constant money supply into his k% rule for monetary growth. This paper examines the doctrinal and ideological origins and background that lay behind the rules versus discretion distinction.
December 2017
Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Claudio Borio, Leonardo Gambacorta This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that monetary policy is less effective in stimulating bank lending growth when interest rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks’ traditional intermediation activity helps explain the subdued evolution of lending in the period 2010–14.
December 2017
Circumventing the zero lower bound with monetary policy rules based on money
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): Michael T. Belongia, Peter N. Ireland Discussions of monetary policy rules after the 2007–2009 recession highlight the potential ineffectiveness of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of the capacity to manipulate a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long-run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.
December 2017
Optimal monetary and macroprudential policies: Gains and pitfalls in a model of financial intermediation
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Michael T. Kiley, Jae Sim We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument can enhance welfare, but faces important implementation challenges. In particular, a Ramsey planner who adjusts a leverage tax in an optimal way can largely insulate the economy from shocks to intermediation, but a simple-rule approach must be cautious not to limit credit expansions associated with efficient investment opportunities. These results demonstrate the importance of considering both optimal Ramsey policies and simpler, but more practical, approaches in an empirically grounded model.
December 2017
The Yellen rules
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): Alex Nikolsko-Rzhevskyy, David H. Papell, Ruxandra Prodan Suppose that the Fed were to adopt a policy rule. Which rule should it adopt? We propose three criteria. First, the rule should be consistent with good economic performance over a long historical period. Second, the rule should be consistent with recent Fed policy following the Great Recession. Third, the rule should be consistent with projected Fed policy. The first criterion is normative, while the second and third criteria are pragmatic. We consider three rules that have been the focus of extensive policy discussion. The Taylor (1993) and Yellen (2015) rules are “balanced” in the sense that the coefficients on the inflation and output gaps are equal, while the Yellen (2012) rule is an example of an “output gap tilting” rule because the coefficient on the output gap is larger than the coefficient on the inflation gap. We also consider “inflation gap tilting” rules where the coefficient on the inflation gap is larger than the coefficient on the output gap. An inflation gap tilting version of the Yellen (2015a) rule with a time-varying equilibrium real interest rate provides the most consistency with the three criteria. This paper was prepared for “Monetary Rules for a Post-Crisis World,” Mercatus-CMFA Academic Conference, September 7, 2016. We thank the participants at the conference for helpful comments and discussions.
December 2017
Bank capital, the state contingency of banks’ assets and its role for the transmission of shocks
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Michael K
December 2017
A proposal to clarify the objectives and strategy of monetary policy
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): Robert L. Hetzel Academic economists have perennially made arguments for the conduct of monetary policy constrained by an explicit rule. These arguments have gone nowhere. This paper advances a proposal to clarify Fed objectives and strategy in order to facilitate discussion leading to consensus over a desirable rule. The essence of the proposal is to replace the forecasts of the individual participants at FOMC meetings now contained in the Summary of Economic Projections with a consensus FOMC forecast accompanied by commentary on the strategy for monetary policy underlying the forecast.
December 2017
Macroprudential policy with convertible debt
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Hylton Hollander This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that a countercyclical capital adequacy rule and CoCos provide an effective dual approach to macroprudential policy. On the one hand, a capital adequacy rule mitigates the build-up of systemic risk through a capital buffer. On the other hand, CoCos are able to reduce the impact of a sudden decline in bank capital.
December 2017
Monetary policy rules in light of the great recession
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): Scott Sumner At least four heterodox theories have gained increasing popularity in response to the Great Recession. These include a revival of old Keynesian macroeconomics, the view that the central bank should try to prevent asset price bubbles, the NeoFisherian perspective, and market monetarism, which is my own view. All of these perspectives can be seen as the profession wrestling with the implications of near-zero interest rates. In my view, pre-2008 macro theory provides all of the tools we need to understand the Great Recession. A policy of nominal GDP targeting, perhaps guided by market forecasts, could have greatly moderated the 2007-09 slump.
December 2017
Global banking and the conduct of macroprudential policy in a monetary union
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Jean-Christophe Poutineau, Gauthier Vermandel This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.
December 2017
Next generation monetary policy
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): Miles Kimball
December 2017
Countercyclical capital rules for small open economies
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Daragh Clancy, Rossana Merola The growing literature on macroprudential regulation focuses on how a combination of monetary and macroprudential policies can boost macroeconomic and financial stability. We contribute to this literature by developing a DSGE model that assesses the effectiveness of countercyclical capital regulation in small open economies, in monetary unions or with exchange rate pegs, where policymakers do not have full control over traditional stabilisation instruments such as nominal interest and exchange rates. In such economies, macroprudential policy could potentially play an even more relevant role in mitigating the adverse effects of macro-financial feedback loops. To validate the model’s ability to replicate the stylised facts of financial crises, we calibrate using data for the Irish economy, the scene of a recent housing crash. Our results demonstrate that the pro-active use of countercyclical capital regulation – in the form of Basel III-type rules – can help attenuate boom-bust cycles driven by over-optimistic expectations. We also find that more aggressive action by regulators during the release phase can bolster the economy’s ability to absorb a negative shock.
December 2017
Permanent versus temporary monetary base Injections: Implications for past and future Fed Policy
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part A Author(s): David Beckworth Despite the Federal Reserve's use of quantitative easing (QE) programs, the U.S. economy experienced one of the weakest recoveries on record following the Great Recession. Not only was real growth disappointingly low, but even nominal growth over which monetary policy has more control was feeble. Why did QE fail to stimulate robust aggregate demand growth? This paper argues the answer is that the Federal Reserve could not credibly commit to a permanent expansion of the monetary base under QE. Both quantity theoretic and New Keynesian models show, however, that a permanent expansion of the monetary base is needed to spur aggregate demand growth at the zero lower bound (ZLB). The Federal Reserve's inability to do so meant its QE programs got consigned to ‘irrelevance results’ of Krugman (1998) and Eggertson and Woodford (2003) and were never going to spark a strong a recovery. Going forward, this inability to commit to a permanent expansion of the monetary base at the ZLB will continue to weigh down on the effectiveness of Fed policy. As a result, this paper calls for a new monetary policy regime of a NGDP level target that is backstopped by the consolidated balance sheet of the government.

Monetary and macroprudential policy with foreign currency loans
Publication date: December 2017
Source:Journal of Macroeconomics, Volume 54, Part B Author(s): Micha
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