Heterogeneous Consumers and Fiscal Policy Shocks

This paper studies empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that differ depending on individual characteristics. We use data from the Consumption Expenditure Survey to estimate individual‐level responses and multipliers for government spending. We find that unexpected fiscal shocks have substantially different effects on consumers depending on their income and age levels: the wealthiest individuals tend to behave according to predictions of standard Real Business Cycle (RBC) models, whereas the poorest ones behave according to standard IS–LM (non‐Ricardian) models, most likely due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality.     

Decentralized Investment Management: Evidence from the Pension Fund Industry

Using a unique data set, we document two secular trends in the shift from centralized to decentralized pension fund management over the past few decades. First, across asset classes, sponsors replace generalist balanced managers with better‐performing specialists. Second, within asset classes, funds replace single managers with multiple competing managers following diverse strategies to reduce scale diseconomies as funds grow larger relative to capital markets. Consistent with a model of decentralized management, sponsors implement risk controls that trade off higher anticipated alphas of multiple specialists against the increased difficulty in coordinating their risk‐taking and the greater uncertainty concerning their true skills.     

A Cross‐Country Analysis of the Risk Factors for Depression at the Micro and Macro Levels

Past research has provided evidence of the role of some personal characteristics (age, gender, religion) as risk factors for depression. However, few researchers have jointly examined the specific impact of each characteristic and whether country characteristics (economic performance and others environmental factors) change the probability of being depressed. In general, this is due to the use of single‐country databases. The aim of this article is to extend previous findings by employing a much larger dataset and including the above‐mentioned country effects. We estimate probit models with country effects (model I) and we also explore linkages between specific environmental factors and depression (model II includes variables such as per capita Gross Domestic Product and the GINI index). The dataset for this research comes from the 2007 GALLUP Public Opinion Poll that allows us to consider a large and widely heterogeneous set of micro‐data. Findings indicate that depression is positively related to being a woman, adulthood, divorce, widowhood, unemployment, and low income. Moreover, we provide evidence of the significant association between economic performance and depression. Inequality raises the probability of being depressed, specially for those living in urban areas. Finally, we find that some population characteristics such as age distribution and religious affiliation facilitate depression.     

Detecting and Predicting Forecast Breakdowns

We propose a theoretical framework for assessing whether a forecast model estimated over one period can provide good forecasts over a subsequent period. We formalize this idea by defining a forecast breakdown as a situation in which the out-of-sample performance of the model, judged by some loss function, is significantly worse than its in-sample performance. Our framework, which is valid under general conditions, can be used not only to detect past forecast breakdowns but also to predict future ones. We show that main causes of forecast breakdowns are instabilities in the data-generating process and relate the properties of our forecast breakdown test to those of structural break tests. The empirical application finds evidence of a forecast breakdown in the Phillips' curve forecasts of U.S. inflation, and links it to inflation volatility and to changes in the monetary policy reaction function of the Fed.     

THE WORLD ECONOMY: ANALYSIS AND PROSPECTS

In this chapter of the review, Oxford Economic Forecasting providesan analysis of the current world economic climate and sets outthe main features of its latest forecast. Section I gives asummary of world prospects. The UK forecast is covered in moredetail in Section II. Part III examines an issue of some importancefor the world economy: the effects of lower oil prices.     

Optimal Fiscal Policy with Consumption Taxation

We characterize optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labor income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policymaker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labor income taxation. Then, we quantify numerically each of these gains by calibrating the model on the U.S. economy.     

What Is the Importance of Monetary and Fiscal Shocks in Explaining U.S. Macroeconomic Fluctuations?

This paper analyzes the importance of monetary and fiscal policy shocks in explaining U.S. macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations, and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.     

Sovereign Default,Domestic Banks,and Financial Institutions

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions.