Comment on: “Inflation dynamics with search frictions: A structural econometric analysis” by Krause, Lopez-Salido and Lubik

The implications of search frictions on the inflation dynamics are shown here for the case with wage adjustments typically belonging to the New Keynesian model, not to the Mortensen–Pissarides framework. In that model variant, I identify the role of search frictions by an additional term entering the slope coefficient of the inflation equation. After a numerical exercise, I find results that are in line with those obtained by Krause et al. [2008. Inflation dynamics with search frictions: a structural econometric analysis. Journal of Monetary Economics 55, doi:10.1016/j.jmoneco.2008.05.003.].     

Labor tax reform, unemployment, and search

A key obstacle to reducing payroll taxes in many industrialized and transition countries is the direct revenue loss to the government that it implies. This paper studies a simple and practical labor tax reform of reducing a payroll tax and increasing a progressive wage tax that keeps the marginal tax wedge unchanged. Such a strategy increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. Moreover, welfare rises if workers’ bargaining power is sufficiently large to exceed a critical value determined by the second-best Hosios condition.      

Search and matching frictions and optimal monetary policy

A recent literature has merged the New Keynesian and the search and matching frameworks, which has allowed the former to analyze the joint dynamics of unemployment and inflation. This paper analyzes optimal monetary policy in this kind of hybrid framework. I show that zero inflation is optimal when all wages are Nash bargained in every period and the economy's steady state is efficient. In the more realistic case in which nominal wage bargaining is staggered, a case against price stability arises: in response to real shocks, the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates. For a plausible calibration, the welfare loss under the zero inflation policy is about three times as large as under the optimal policy.     

Transitions in the German labor market: Structure and crisis

Since the so-called Hartz IV reforms around 2005 and during the global crisis of 2008/2009, the German labor market featured mainly declining unemployment rates. We develop a search and matching model with heterogeneous skills to explore the role of structural and cyclical policies for this performance. Calibrating unemployment benefits to approximate legislation before and after the reforms, we find a large reduction in unemployment and its duration, with the transition concluding after about three years. During the crisis, the extended use of short-time labor subsidies that prevent jobs from being destroyed is likely to have prevented strong increases in unemployment.     

Empirical investigation of stock index futures market efficiency: the case of the Athens Derivatives Exchange

Pricing and trading practices in the Athens Derivatives Exchange, a newly established derivatives market, result in significant futures arbitrage profit opportunities for low-cost traders. We find that a large part of the mispricing is due to transaction costs, but additional factors, such as anticipated volatility and time to maturity, also contribute. Ex ante tests reveal significant arbitrage opportunities that could have been exploited up to 30 min after they had been identified. All different tests employed indicate that the derivatives market was inefficient during its early trading history because arbitrage opportunities persisted even after other market impact costs were taken into consideration.     

我国城市化进程与城乡收入差距的内在关系研究——基于托达罗模型的分析

本文以托达罗模型为框架,在“双二元”假设下,构造了劳动力转移的数理模型,分析中国城市化进程与城市劳动力市场的关系.结果显示,城乡收入差距是影响城市化进程的主要因素.随着城乡收入差距的扩大,城市化以单纯的人口迁移和农民工进城的方式展开,表现为粗放式的城市化.只有提高现代工业部门生产效率,同时引导金融资源进入农村,加快产业...     

Uncovered Interest Parity,Forward Guidance and the Exchange Rate

Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using U.S., euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.     

Search Frictions,Real Rigidities,and Inflation Dynamics

The literature on New Keynesian models with search frictions in the labor market commonly assumes that price setters are not actually subject to such frictions. Here, I propose a model where firms are subject both to infrequent price adjustment and search frictions. This interaction gives rise to real price rigidities, which have the effect of slowing down the adjustment of the price level to shocks. This has a number of consequences for equilibrium dynamics. First, inflation becomes less volatile and more persistent. More importantly, the model’s empirical performance improves along its labor market dimensions, such as the size of unemployment fluctuations and the relative volatility of the two margins of labor.     

The price and volume response to earnings announcements in the corporate bond market

We examine abnormal returns and trading activity in bond markets around earnings announcements. Previous work provides mixed evidence on the relative impact of positive and negative surprises and the degree of response in investment-grade and speculative-grade bonds. We find that these announcements convey value-relevant information for both positive and negative earnings surprises in both investment and speculative-grade bonds. We also document significant heterogeneity in the response across industries, with muted responses in both abnormal returns and trading activity for bonds of firms in the financial and utilities industries.     

An examination of the equity market price linkage between Australia and the European Union using leveraged bootstrap method

The paper examines the equity market price interaction between Australia and the European Union – represented by the UK, Germany and France – based on the Toda–Yamamoto causality test, which is bootstrapped with leveraged adjustments. A new information criterion is used to choose the optimal lag order. Weekly MSCI data covering the period 1988 to 2001 is used, divided into two subperiods to allow for a structural break arising from the ERM crisis of 1992. Results show that, during the period before the ERM crisis, no significant causal links exist between Australia and any of three EU countries. During the period after the ERM crisis, Australia also had no causal links with Germany and France but it had with the UK, with causality running from the UK to Australia but not vice-versa. Thus, Australian investors may find the German and French, but not the UK, equity markets, attractive venues for their international diversification. German and French, but not British, investors may also obtain the same benefit from the Australian equity market.     

Prices and returns on paintings: An exercise on how to price the priceless

Art is priceless, but paintings, and other objects, have been sold on markets since the time of the Roman Empire. In this paper, we describe a method for constructing a price index for paintings and compare this index to the indices of various financial markets. In particular, we discuss whether the price of art is related to financial markets, whether the art market is weakly efficient, and whether it is more or less risky than financial markets.     

Tests of the efficiency of the U.S. rights offering market: An option pricing approach

The efficiency of the U.S. market for stock purchase rights is empirically analyzed in an options framework, in which prices of rights, given the prices of underlying stock, are examined with regard to the possibilities of actually earning above-normal profits, considering the risk taken. Two neutral hedging tests for market efficiency, along with a simple buy-and-exercise trading strategy, are applied to daily traded rights data. Results from ex-post hedging tests suggest that the trading strategy based on the rights valuation model is able to differentiate between overpriced and underpriced rights so as to generate substantial book profits. The positive ex-ante hedge return, found to exist empirically, is completely eliminated once transaction costs are introduced, lending support for the efficient U.S. rights offering market on an after-transaction cost basis.     

Futures and forward price differential and the effect of marking‐to‐market: Australian evidence

The objective of this paper is to examine the effects of marking‐to‐market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al ., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al ., (1981) propositions, implying that the effect of marking‐to‐market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures‐forward price difference.     

Futures and forward price differential and the effect of marking‐to‐market: Australian evidence

The objective of this paper is to examine the effects of marking‐to‐market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al ., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al ., (1981) propositions, implying that the effect of marking‐to‐market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures‐forward price difference.     

Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment*

We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly‐available quarterly data set of fiscal variables for the period 1981–2007. To allow for comparability with previous results on euro‐area countries and the US, we use a standard structural vector autoregressive (VAR) framework, and study the impact of aggregated and disaggregated government spending and net‐tax shocks. In addition, to frame euro‐area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the results to the inclusion of variables aiming to control for underlying financial and fiscal conditions. The main new findings are that: expansionary fiscal shocks have a short‐term positive impact on GDP and private consumption, with government spending shocks entailing, in general, higher effects on economic activity than (net) tax reductions; output multipliers to government expenditure shocks are of similar size in the euro area and in the US; the persistence of a fiscal spending shock is higher in the US than in the euro area, which appears to be related to military spending in the US; and fiscal multipliers have increased over the recent past in both geographical areas.     

Modelling illiquidity spillovers with Hawkes processes: an application to the sovereign bond market

Modelling the dynamics of (il)liquidity across assets is an important yet complicated task, especially when considering significant deteriorations of liquidity conditions. Here, we propose a peak-over-threshold method to identify abrupt liquidity drops from limit order book data and we model the time-series of these illiquidity events across multiple assets as a multivariate Hawkes process. This allows us to quantify both the self-excitation of extreme changes of liquidity in the same asset (illiquidity spirals) and the cross-excitation across different assets (illiquidity spillovers). Applying the method to the MTS sovereign bond market, we find significant evidence for both illiquidity spillovers and spirals. The proportion of shocks explained by illiquidity spillovers roughly doubles from 2011 to 2015, suggesting an increased synchronization of extreme illiquidity across assets.     

Monetary policy and financial stability: What role for the futures market?

This paper examines interactions between monetary policy and financial stability. There is a general view that central banks smooth interest rate changes to enhance the stability of financial markets. But might this induce a moral hazard problem, and induce financial institutions to maintain riskier portfolios, the presence of which would further inhibit active monetary policy? Hedging activities of financial institutions, such as the use of interest rate futures and swap markets to reduce risk, should further protect markets against consequences of unforeseen interest rate changes. Thus, smoothing may be both unnecessary and undesirable. The paper shows by a theoretical argument that smoothing interest rates may lead to indeterminacy of the economy's rational expectations equilibrium. Nevertheless, our empirical analysis supports the view that the Federal Reserve smoothes interest rates and reacts to interest rate futures. We add new evidence on the importance for policy of alternative indicators of financial markets stress.     

The Cyclical Reaction of Fiscal Policies in the Euro Area: The Role of Modelling Choices and Data Vintages*

We survey the recent empirical literature concerning the cyclical response of fiscal policies in the euro area, finding large differences in results. We show that these differences are heavily influenced by the choices made in modelling fiscal behaviour. We make a case for the use, in assessing policies and in the EMU context, of the standard modelling choice where the discretionary reaction of fiscal policy is directly estimated. Models where the overall reaction to the cycle – which includes the effects of both discretionary actions and automatic stabilisers – is directly estimated tend to suggest either strong pro‐cyclical or strong counter‐cyclical discretionary reactions, depending on how this component is identified. Within the standard model and for the years 1994 to 2008, we show that results are significantly affected by the data vintage (ex post or real‐time). With ex post data, we find an unambiguous indication of a‐cyclicality. Using real‐time data, we find that the output gap matters. However, depending on whether we assess policy intentions or actual policies, euro‐area governments' behaviour radically changes. A plausible interpretation is that in the implementation phase, governments loosen their fiscal stance, giving in to political pressures that are proportional to the scale of the economic difficulties in bad times and the size of the ‘growth dividend’ in good times.     

Geographic Cross-Sectional Fiscal Spending Multipliers and the Role of Local Autonomy: Evidence from European Regions

Using a panel of 268 European regions during 1990–2014, we document that the degree of local government's autonomy, measured with the “Local Autonomy Index,” has a significant positive effect on the fiscal spending multiplier. The estimated geographic cross-sectional fiscal spending multiplier is on average close to zero in countries with the lowest degree of local autonomy, and around unity in countries with the highest degree of local autonomy. Multipliers are state-dependent: larger when gross domestic product is below trend and when there is slack in the labor market; in those states, local autonomy has a particularly large positive effect on the multiplier. To interpret the empirical findings, we build a Dynamic Stochastic General Equilibrium (DSGE) model where both local and central government spending contribute to a public good that enhances private labor productivity. Local governments are more efficient in producing the public good and the multiplier is higher in countries where local government spending has a larger share in the production of the public good.     

Buyers' and sellers' markets: A simple rational expectations search model of the housing market

The terms buyers' market and sellers' market are commonly used in contexts that most economists would characterize as excess supply and excess demand. It is puzzling, however, that in many instances the press and general public are all aware that it is a buyers' or sellers' market. Are these markets really that inefficient? We offer definitions of buyers' and sellers' markets that are consistent with a full rational expectations equilibrium in a simple general equilibrium search model of a heterogeneous durable goods market.