The European Refugee Crisis and the Natural Rate of Output
Applied Economics Letters,
The European Commission follows a harmonized approach for calculating structural (potential) output for EU member states that takes into account labour as an important ingredient. This article shows how the recent huge migrants’ inflow to Europe affects trend output. Due to the fact that the immigrants immediately increase the working population but effectively do not enter the labour market, we illustrate that the potential output is potentially upward biased without any corrections. Taking Germany as an example, we find that the average medium-term potential growth rate is lower if the migration flow is modelled adequately compared to results based on the unadjusted European Commission procedure.
Central Bank Transparency and Cross-border Banking
Journal of International Money and Finance,
We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent and operates in a stable economic environment. Central bank transparency and credibility are thus considered complements by banks investing abroad.
Global Food Prices and Monetary Policy in an Emerging Market Economy: The Case of India
Journal of Asian Economics,
This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that a big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks.
Sign Restrictions, Structural Vector Autoregressions, and Useful Prior Information
This paper makes the following original contributions to the literature. (i) We develop a simpler analytical characterization and numerical algorithm for Bayesian inference in structural vector autoregressions (VARs) that can be used for models that are overidentified, just‐identified, or underidentified. (ii) We analyze the asymptotic properties of Bayesian inference and show that in the underidentified case, the asymptotic posterior distribution of contemporaneous coefficients in an n‐variable VAR is confined to the set of values that orthogonalize the population variance–covariance matrix of ordinary least squares residuals, with the height of the posterior proportional to the height of the prior at any point within that set. For example, in a bivariate VAR for supply and demand identified solely by sign restrictions, if the population correlation between the VAR residuals is positive, then even if one has available an infinite sample of data, any inference about the demand elasticity is coming exclusively from the prior distribution. (iii) We provide analytical characterizations of the informative prior distributions for impulse‐response functions that are implicit in the traditional sign‐restriction approach to VARs, and we note, as a special case of result (ii), that the influence of these priors does not vanish asymptotically. (iv) We illustrate how Bayesian inference with informative priors can be both a strict generalization and an unambiguous improvement over frequentist inference in just‐identified models. (v) We propose that researchers need to explicitly acknowledge and defend the role of prior beliefs in influencing structural conclusions and we illustrate how this could be done using a simple model of the U.S. labor market.
Macroeconomic Factors and Micro-Level Bank Risk
Bundesbank Discussion Paper 20/2010,
The interplay between banks and the macroeconomy is of key importance for financial and economic stability. We analyze this link using a factor-augmented vector autoregressive model (FAVAR) which extends a standard VAR for the U.S. macroeconomy. The model includes GDP growth, inflation, the Federal Funds rate, house price inflation, and a set of factors summarizing conditions in the banking sector. We use data of more than 1,500 commercial banks from the U.S. call reports to address the following questions. How are macroeconomic shocks transmitted to bank risk and other banking variables? What are the sources of bank heterogeneity, and what explains differences in individual banks’ responses to macroeconomic shocks? Our paper has two main findings: (i) Average bank risk declines, and average bank lending increases following expansionary shocks. (ii) The heterogeneity of banks is characterized by idiosyncratic shocks and the asymmetric transmission of common shocks. Risk of about 1/3 of all banks rises in response to a monetary loosening. The lending response of small, illiquid, and domestic banks is relatively large, and risk of banks with a low degree of capitalization and a high exposure to real estate loans decreases relatively strongly after expansionary monetary policy shocks. Also, lending of larger banks increases less while risk of riskier and domestic banks reacts more in response to house price shocks.