The economy as an evolutionary pulsator

The problem of Long Waves is formalized as one of the dynamical coupling of a relatively steady flow of new techniques and goods along with the endemic tendency of capitalism to evolve in a cyclical fashion. This implies a strong exogenous influence which renders any precise periodicity unlikely. The model is illustrated by a hypothetical, historically determined potential which controls the path in time of the economy.     

Incomplete markets,liquidation risk,and the term structure of interest rates

We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds. Long bonds command a “liquidation risk premium” over short bonds, because they may have to be liquidated before maturity – following a bad idiosyncratic shock – precisely when their resale value is low – due to the simultaneous occurrence of a bad aggregate shock. Our framework endogenously generates limited cross-sectional wealth heterogeneity among the agents (despite the presence of uninsured idiosyncratic shocks), which allows us to characterise analytically the shape of the entire yield curve, including the yields on bonds of arbitrarily long maturities. Agents? desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies that a greater bond supply raises the level of the yield curve, while an increase in the relative supply of long bonds raises its slope.     

Does Trade Credit Substitute Bank Credit? Evidence from Firm‐level Data

The paper examines micro data on Italian manufacturing firms' inventory behaviour to test the Meltzer (1960) hypothesis according to which firms substitute bank credit with trade credit (TC) during money tightening. We find that inventory investment of Italian manufacturing firms is constrained by their availability of TC and that this effect more than doubles during monetary restrictions. As for the magnitude of the substitution effect, however, we find that it is not sizeable. This is in line with the micro theories of TC and the evidence on actual firm practices, according to which credit terms display modest variations over time .     

Habit persistence and the long-run labor supply

Standard macroeconomic models possess the undesirable feature that people stop working in the long run. Assuming standard parameters, the neoclassical model predicts that 2% of annual productivity growth leads to a 99% decline in the labor supply after 624 years. Yet, this contradicts the fact that labor hours per capita are relatively stable, even over a long period of time. This paper shows how internal and external habit persistence each work to stabilize the long run labor supply, independent of key parameter choices.     

An estimated fiscal Taylor Rule for the postwar United States

This paper estimates a multi-instrument fiscal Taylor Rule for the United States. Taxes and purchases both respond strongly to deficits, while transfers do not. Taxes are procyclical; purchases are acyclical; and transfers are countercyclical. These estimates appear stable over time.     

Inflation, investment and economic performance: The role of internal financing

This paper studies a link between inflation and economic activity that is built on two hypotheses. First, firms mitigate informational frictions in financial markets by accumulating retained earnings over a period of time. Second, firms allocate earnings among three competing uses - dividends, current investment, and the accumulation of internal funds - and inflation directly distorts this allocation decision as well as the real value of accumulated internal funds. The model predicts that the level of inflation - both unanticipated and expected inflation - as well as the variability of inflation distort firms’ internal financing decisions, increases frictions in financial markets, reduces the level and efficiency of investment, and reduces aggregate output. The marginal effects of inflation are increasing in the inflation rate.     

UK INFLATION: PERSISTENCE, SEASONALITY AND MONETARY POLICY

In the light of the changes to UK monetary policy since the early 1980s, we study the existence and nature of changes in the properties of retail price inflation over this period. A feature of our analysis is the attention paid to the marked seasonal pattern of monthly UK inflation. After taking account of seasonality, both univariate and Phillips curve models provide strong evidence of changes in the level and persistence of inflation around the end of 1992, at the time of the introduction of inflation targeting. Indeed, all models point to the effective disappearance of inflation persistence after this date, implying that constant-parameter models estimated using both pre- and post-inflation targeting data periods should be treated with considerable caution.     

Irreversible investment with regime shifts

Under the real options approach to investment under uncertainty, agents formulate optimal policies under the assumption that firms’ growth prospects do not vary over time. This paper proposes and solves a model of investment decisions in which the growth rate and volatility of the decision variable shift between different states at random times. A value-maximizing investment policy is derived such that in each regime the firm's investment policy is optimal and recognizes the possibility of a regime shift. Under this policy, investment is intermittent and increases with marginal q. Moreover, investment typically is very small but, in some states, the capital stock jumps. Implications for marginal q and the user cost of capital are also examined.     

Does trust favor macroeconomic stability?

This paper investigates the relationship between trust and macroeconomic volatility. An illustrative model rationalizes the relationship between trust and volatility. In this model, trust relaxes credit constraints and diminishes investment’s procyclicality. I provide empirical evidence for the basic predictions of the model. Then, I show that higher trust is associated with lower macroeconomic volatility in a cross section of countries. This relationship persists when various covariates are taken into account. I use inherited trust of Americans as an instrumental variable for trust in their origin country to overcome reverse causality concerns. Using changes in inherited trust over the 20th century, I do not find clear evidence that increasing trust is also associated with decreasing volatility across time at the country level.     

UK macroeconomic forecasting with many predictors: Which models forecast best and when do they do so?

Block factor methods offer an attractive approach to forecasting with many predictors. These extract the information in these predictors into factors reflecting different blocks of variables (e.g. a price block, a housing block, a financial block, etc.). However, a forecasting model which simply includes all blocks as predictors risks being over-parameterized. Thus, it is desirable to use a methodology which allows for different parsimonious forecasting models to hold at different points in time. In this paper, we use dynamic model averaging and dynamic model selection to achieve this goal. These methods automatically alter the weights attached to different forecasting models as evidence comes in about which has forecast well in the recent past. In an empirical study involving forecasting output growth and inflation using 139 UK monthly time series variables, we find that the set of predictors changes substantially over time. Furthermore, our results show that dynamic model averaging and model selection can greatly improve forecast performance relative to traditional forecasting methods.     

LONG‐RUN INEQUALITY AND SHORT‐RUN INSTABILITY OF MEN'S AND WOMEN'S EARNINGS IN CANADA

This paper examines the variability of workers’ earnings in Canada over the period 1982–2006. We decompose the total variance of workers’ earnings into a ‘permanent’ component between workers and a ‘transitory’ earnings instability component over time for given workers. We then investigate the statistical relationships between these components and indicators for the business cycle. The most marked change in earnings variances in Canada since 1982 is the general rise in total earnings variance, which is essentially driven by a quite dramatic rise in long‐run earnings inequality. The patterns across age categories of the two variance components are almost opposite. Long‐run earnings inequality generally rises with age, but earnings instability is seen to generally decline with age, so that earnings instability is markedly highest among entry age workers. Unemployment rate effects are positive on almost all variance measures, while higher unemployment is associated with widened long‐run earnings differentials and greater short‐run earnings instability.     

Changing transmission of monetary policy on disaggregate inflation in India

This paper investigates the time-varying effects of monetary policy on aggregate, sectoral, and disaggregate inflation in India from 1997 to 2017 using a large dataset of 439 variables. We find that the effectiveness of a contractionary monetary policy in controlling aggregate inflation has improved over time. This improvement in the policy's effectiveness can be attributed to better transmission through credit and asset price channels. In investigating disaggregate inflation, we find that a contractionary monetary policy is more effective in reducing inflation in the manufacturing sector than in the agricultural sector. Further, the sacrifice ratios in all manufacturing sectors have improved over time. However, the commodities prices of some sectors respond positively after a monetary contraction, which demonstrates the presence of a cost channel in the Indian economy. Our findings suggest that the monetary authority in India should have an interest rate rule that incorporates sectoral inflation and reacts to each with different intensity.     

Convergence in price levels across US cities

This paper empirically tests for convergence in consumer price indices across 17 major cities in US over the 1918-2008 period. By using the novel OLS estimator introduced by Bao, Y., Dhongde, S., 2009. Testing convergence in income distribution. Oxford Bulletin of Economics and Statistics 71, 295-302, we find overwhelming evidences in support of price level convergence over time.     

Stock Market Fluctuations and Money Demand in Italy, 1913–2003

This paper examines the impact of stock market fluctuations on money demand in Italy from a long‐run perspective. The money demand function estimated by Muscatelli and Spinelli (2000) for a long time span is utilized as a benchmark, adding to the specification information on share prices from the Milan Stock Exchange Reform of 1913 to recent years. For a shorter time period (1938–2003), annual observations on stock market capitalization and turnover velocity are also considered. The empirical findings suggest that stock market fluctuations help to explain temporary movements in liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long‐run relationship is unstable. In a dynamic, short‐term specification of money demand, the estimated coefficient of deflated stock prices is positive, and therefore compatible with a wealth effect, in the years 1913–1980, while in the last two decades a substitution effect has prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalization. Moreover, in the recent period, stock market turnover and money growth are positively correlated .     

Production subsidies and redistribution

Who gains from stimulating output? We explore a dynamic model with production subsidies where the population is heterogeneous in one dimension: wealth. There are two channels through which production subsidies redistribute resources across the population. First, poorer agents gain from a rise in wages, since—to the extent there is an operative wealth effect in labor supply—they work harder. Second, because a current output boost will raise consumption today relative to the future, thus lowering real interest rates, poor agents gain in relative terms since their income is based less on interest income. We examine optimal redistribution from the perspective of an arbitrary consumer in the population. We show that, if this consumer has commitment at time zero to set all present and future subsidy rates, and for a class of preferences that admits aggregation in wealth, then output stimulation, and hence redistribution, will only occur at time zero; after that, subsidies are zero. A byproduct of our analysis of this environment is a median-voter theorem: with direct voting over subsidy sequences at time zero, the sequence preferred by the median-wealth consumer is the unique outcome. We also study lack of commitment, since interest-rate manipulation is associated with time inconsistency. We analyze this case formally by looking at the Markov-perfect (time-consistent) equilibrium in a game between successive identical decision makers (e.g., the median agent). Here, subsidies persist—they are constant over time—and are more distortionary than under commitment. Moreover, whereas under commitment asset inequality changes initially—in favor of the consumer who decides on policy—it does not under lack of commitment.     

Forecasting the probability of US recessions: a Probit and dynamic factor modelling approach

Abstract Quantifying the probability of U.S. recessions has become increasingly important since August 2007. In a data‐rich environment, this paper is the first to apply a Probit model to common factors extracted from a large set of explanatory variables to model and forecast recession probability. The results show the advantages of the proposed approach over many existing models. Simulated real‐time analysis captures all recessions since 1980. The proposed model also detects a significant jump in the next six‐month recession probability based on data up to November 2007, one year before the formal declaration of the recent recession by the NBER.     

Public debt and optimal taxes without commitment

Benhabib and Rustichini [Optimal taxes without commitment, J. Econ. Theory 77 (1997) 231-259] study the properties of optimal capital taxes in economies without commitment and no government debt. They find that capital taxes may be different from zero at steady state. This note shows that, once governments have the possibility of issuing debt and smoothing taxes over time, optimal steady state capital taxes turn out to be zero.     

Systemic risk: The coordination of macroprudential and monetary policies in China

The literature documents the effects of monetary and macroprudential policies in controlling systemic risk, but empirical evidence of a systemwide framework that effectively coordinates the two policies is lacking. This study assesses the effectiveness, channels, and timeliness of monetary and macroprudential policies’ impacts on systemic risk in China from January 2009 to June 2018, and contributes to the discussion of how to coordinate these policies. Using an index synthesized from 28 indicators to proxy China’s systemic risk, we find the following: (1) A contractionary monetary (macroprudential) shock increases (reduces) systemic risk over the entire shock time period. (2) Macroprudential (monetary) policy is effective in the long (short) term. (3) The systemic risk intervention effect of monetary (macroprudential) policy is channeled through inflation control (asset price stability).     

The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials

Abstract. With persistence in macroeconomic variables two aspects of exchange rate credibility emerge whose relative importance varies over time. Both aspects have opposite implications for the relation between fundamentals and credibility. Hence, the effect of policy measures on interest rate differentials becomes ambiguous. In this paper a Markov-switching VAR that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent determination of credibility for major EMS currencies. Regime-dependent impulse response functions reveal substantial differences in the response of spreads to macroeconomic shocks across regimes.