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Driscoll & Holden: Behavioral economics and macroeconomic models

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ABSTRACT: Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy—for example, the counterfactual absence of inertia in the standard New

Cobham: Multiple objectives in monetary policy

target_money

ABSTRACT: A statistical methodology is developed to identify, for calendar years between 1974 and 2012, when policymakers in ‘advanced’ economies have pursued single objectives of different kinds, or multiple objectives. A simple criterion is then used to distinguish between multiple objectives pure and simple and

Auray, Eyquem & Ma: Banks, Sovereign Risk and Unconventional Monetary Policies

Marriner_S._Eccles_Federal_Reserve_Board_Building

Abstract We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the Euro Area, the model performs satisfactorily in matching key business cycle facts on real, financial and fiscal time series. We then use the model to assess

Bayoumi, Dell’Ariccia, Habermeier, Mancini-Griffoli & Valencia (IMF): Monetary Policy in the New Normal

Marriner_S._Eccles_Federal_Reserve_Board_Building

From the Executive Summary: The global financial crisis challenged the existing monetary policy paradigm. Before the crisis, dangerous financial imbalances grew under stable output gaps and low inflation. After the bust, a massive stimulus mitigated the downturn, but could not prevent the deepest recession since

Fehr & Uhde: Means-Testing and Economic Efficiency in Pension Design

public-pensions

ABSTRACT: The present paper studies the efficiency properties of means-tested pay-as-you-go financed social security systems. Starting from a benchmark economy without social security, we introduce pension systems of various institutional designs and compare the costs arising from liquidity constraints as well as distortions of labor

Driscoll & Holden: Behavioral economics and macroeconomic models

images (3)

ABSTRACT:

Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy—for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioral economics to improve some of the underpinnings of the New Keynesian model—specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the possibility of multiple equilibria and asset price bubbles. We also discuss more broadly the advantages and disadvantages of using behavioral economics features in macroeconomic models.

 

Available for download here.

Cobham: Multiple objectives in monetary policy

target_money

ABSTRACT:

A statistical methodology is developed to identify, for calendar years between 1974 and 2012, when policymakers in ‘advanced’ economies have pursued single objectives of different kinds, or multiple objectives. A simple criterion is then used to distinguish between multiple objectives pure and simple and multiple objectives subject to a price stability constraint. Unconditional and conditional analyses of the inflation and growth associated with different types of objectives reveal that multiple objectives subject to a price stability constraint are associated with roughly as good economic performance as the single objective of inflation. A proposal is then made as to how the remit of an inflation-targeting central bank could be adjusted to allow it to pursue other objectives in extremis without losing the credibility effects associated with inflation targeting.

 

Available for download here.

Auray, Eyquem & Ma: Banks, Sovereign Risk and Unconventional Monetary Policies

Marriner_S._Eccles_Federal_Reserve_Board_Building

Abstract

We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the Euro Area, the model performs satisfactorily in matching key business cycle facts on real, financial and fiscal time series. We then use the model to assess the effects of a large crisis and quantify the potential effects of alternative unconventional policies on the dynamics of GDP, sovereign default risk and public indebtedness. We show that quantitative monetary easing is more efficient in stimulating GDP, while qualitative monetary easing relieves financial tensions and sovereign risk more efficiently. In terms of welfare, in the short run, unconventional monetary policies bring sizable welfare gains for households, while the long term effects are much smaller.

Available for download here.

Bayoumi, Dell’Ariccia, Habermeier, Mancini-Griffoli & Valencia (IMF): Monetary Policy in the New Normal

Marriner_S._Eccles_Federal_Reserve_Board_Building

From the Executive Summary:

The global financial crisis challenged the existing monetary policy paradigm. Before the crisis, dangerous financial imbalances grew under stable output gaps and low inflation. After the bust, a massive stimulus mitigated the downturn, but could not prevent the deepest recession since the Great Depression, as policy rates rapidly hit the zero lower bound (ZLB), and large swings in capital flows complicated macroeconomic management in small open economies. This has led to an intense discussion about what shape monetary policy should take once economic conditions have settled down into the post-crisis “new normal.”

This paper reviews the current state of the debate to extract common policy conclusions where possible, and lays out the unresolved issues where extracting such conclusions is not possible. In doing so, the paper raises more questions than it provides answers:

  • Should there be new objectives for monetary policy?
  • Should current policy decision rules be reconsidered?
  • Should there be greater international policy cooperation
  • Should unconventional policy tools become conventional?
  • What are the new challenges for central bank independence?
  • What is the optimal arrangement for monetary, macro-prudential, and micro-prudential policy?

Available for download here.

Fehr & Uhde: Means-Testing and Economic Efficiency in Pension Design

public-pensions

ABSTRACT:

The present paper studies the efficiency properties of means-tested pay-as-you-go financed social security systems. Starting from a benchmark economy without social security, we introduce pension systems of various institutional designs and compare the costs arising from liquidity constraints as well as distortions of labor supply and the accumulation of savings versus the benefits from insurance provision against income uncertainty and mortality risk. We find a positive role of means-testing pension benefits against private assets from a long run welfare perspective. However, when taking transitional cohorts into account, our findings highlight strong aggregate efficiency losses.

 

Available for download here.

Aizenman, Cheung & Ito: International Reserves Before and After the Global Crisis – Is There No End to Hoarding?

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ABSTRACT:

We evaluate the global financial crisis (GFC) and the structural changes of recent years that have been associated with new patterns of hoarding international reserves. We confirm that the determining factors of international reserves are evolving with developments in the global economy. From 1999–2006, the pre-GFC period, gross saving is associated with higher international reserves in developing and emerging markets. An outward direct-investment effect is consistent with the view of diverting international assets from the international reserve account, the “Joneses’ effect” lends support to the rivalry hoarding motivation, and commodity price volatility induces hoarding against uncertainty. During the 2007–2009 GFC, those variables became insignificant or displayed the opposite effect, probably reflecting the frantic market conditions that prevent a normal economic relationship to hold. Nevertheless, the propensity to continue to trade displays a strong positive effect. The 2010–2012 post-crisis results are dominated by factors that have been mostly overlooked in earlier decades. While the effects of swap agreements and gross saving are in line with expectations, we find a change in the link between outward direct investment and international reserves in the pre- and post-crisis period. The macro-prudential policy is found to complement international reserve accumulation. Developed countries display very different demand behaviors for international reserves. Higher gross saving has been associated with lower international reserve holding because developed countries are more likely to deploy their savings in the global capital market. The presence of sovereign wealth funds is associated with a lower level of international reserve holding in industrial countries. Our predictive exercise affirms that if an emerging market economy experienced a deficiency in international reserves holdings in 2012, that economy tended to experience exchange-rate depreciation against the U.S. dollar during the recent adjustment to the news of tapering quantitative easing (QE) in 2013.

 

Available for download here.

 

Fernandes: The Impact of Sovereign Wealth Funds on Corporate Value and Performance

swf

From the paper:

According to the Sovereign Wealth Fund Institute, sovereign wealth funds (SWFs) today manage more than $6 trillion in assets, a number that can be put into perspective by considering that the hedge fund and private equity markets together account for less than $2 trillion. Given their extraordinary size and recent rates of growth, SWFs have received considerable attention in the business press. But most of the commentary has taken the form of anecdotal reporting, and evidence based on statistical analysis of large samples of SWFs has been in short supply. As a consequence, even the most basic questions about SWF investments remain unanswered, mostly owing to the difficulty of obtaining data about their investments. SWFs are unique institutions. Apart from their remark-able size and recent growth rates, SWFs have a number of other important differences from traditional large institutional investors.

Although the capital for sovereign wealth funds comes mainly from national governments, the mission of such funds, and the incentives of the people who make the investment decisions, reflect a peculiar mix of public-sector goals and private-sector methods. And thus, it is not clear a priori what the impact of SWFs on the performance and value of companies is most likely to be. According to their critics, SWFs are primarily a means for governments to carry out national “industrial policy” by channeling capital to favored industries. But according to their defenders, the talents and incentives of the people who manage SWFs tend to make the effects of such funds on targeted companies very similar to the effects of traditional large investors on their portfolio companies—namely, increases in operating efficiency and value. The objective of this article is to assess the overall impact of SWFs on the companies they invest in and to identify the channels they use to affect corporate value and performance.

An important paper–highly recommended!

Available for download here (paywall).

Goldhaber & Grout: Pension Choices and the Savings Patterns of Public School Teachers

public-pensions

From the Introduction:

Few states have incorporated DC features into teacher pension systems and we know very little about how providing teachers with greater control over deferred compensation might affect their savings behavior. In this paper we report on the retirement savings behavior of Washington State teachers enrolled in the state’s hybrid pension plan, which includes a DC component funded by employee contributions. Our research, which is the first quantitative analysis of teachers’ choices of defined contribution rates, speaks to the debate around the structuring of teacher pension systems. Specifically, we address the following questions: 1) How are discretionary retirement savings rates influenced by individual characteristics and the ability to adjust contribution rates?; 2) What can we infer about teacher preferences for current compensation versus the present value of investment in retirement compensation?; and 3) How does the level of retirement savings compare under traditional defined benefit and hybrid pension systems? To answer these questions we use longitudinal pension plan data from Washington State, where public school teachers who enroll in the state’s hybrid pension plan can choose from a menu of contribution rates.

We find that teachers’ initial contribution rate choices appear to be age dependent, and are affected by their beliefs about the ability to adjust contribution rates after the initial rate selection. The preferences of teachers revealed through their choice of contribution rate plans indicates that they value the opportunity to invest in retirement compensation far more than prior evidence has suggested. And, consequently, the total amount per teacher contributed to retirement savings is estimated to be higher under Washington’s hybrid DB-DC pension system than it would be under the more traditional DB-only system.

Available for download here.

Plosser (Philadelphia Fed): Systematic Policy and Forward Guidance

Marriner_S._Eccles_Federal_Reserve_Board_Building

Speech highlights:

• President Plosser highlights the relationship between systematic monetary policy and forward guidance. His goal is to help underscore how a systematic approach to monetary policy can improve the effectiveness of monetary policy in both normal times and in more unusual or extreme circumstances, such as when policy is constrained by the zero lower bound on nominal interest rates.

• President Plosser’s preference for dealing with forward guidance is for the FOMC to articulate a reaction function as best it can. This entails describing a systematic approach to policymaking, where policy decisions are based on available information in a consistent and predictable way.

• President Plosser believes the most recent FOMC statement took a step in this direction when it moved to a qualitative form of forward guidance by stating that the Committee will be assessing progress – both realized and expected – toward its policy objectives.

 

The speech is available for download here.

 

Aldridge & Wood: Monetary policy decision-making and accountability structures – some cross-country comparisons

NZ

From the Introduction:

Monetary policy decisions are now typically taken, and implemented, by independent central banks. Substantial operational independence, of the sort given to most central banks in recent decades, needs to be accompanied by good structures to provide effective governance and accountability. There is no agreement on a single best governance and accountability model, and the details of such systems differ quite widely across countries. There are common features across countries, but each country decides what is best for its own needs.

New Zealand’s central banking legislation was rewritten when the Reserve Bank was given operational independence. The Reserve Bank of New Zealand Act 1989 was explicitly designed to balance considerable operational autonomy for the Reserve Bank with a high degree of formal accountability. In some other countries, changes were undertaken with little or no material change to existing legislation.

This article compares the key features of the monetary policy accountability and governance arrangements of New Zealand and a range of countries with similar approaches to monetary policy.  The focus of this article is on description, and it does not evaluate the relative merits of the different models.

 

Available for download here.

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