2020. Working papers
Andrejs Zlobins
ABSTRACT
This paper studies the effects of low and negative interest rates in the euro area on a wide range of macroeconomic and financial variables and documents the changes in the monetary transmission mechanism once the policy rate reaches the zero lower bound (ZLB). To that end, we employ a set of non-linear time series frameworks, namely a time-varying parameter structural vector autoregression with stochastic volatility and non-linear local projections and perform identification via both sign restrictions and high frequency information approaches. Our findings suggest that the policy rate has continued to support the aggregate demand in the euro area even in sub-zero territory. Despite that, we find that the reaction of inflation and its expectations has significantly deteriorated in the post-ZLB period. Regarding the transmission mechanism, we show that policy rate cuts below zero have a more persistent impact on the term structure and interest rate expectations. In addition to that, our results suggest that negative interest rates do not cause a contraction in lending despite the disconnect of lending rates from the policy rate. In general, our findings contribute to the growing list of literature which questions the empirical relevance of the ZLB.
Keywords: NIRP, ZLB, monetary policy, euro area, non-linearities
JEL code: C54, E43, E52, E58
Ginters Bušs, Patrick Grüning
ABSTRACT
We develop a fiscal DSGE model tailored to Latvia, a small open economy in a monetary union, for the purposes of policy simulation and scenario analysis. The fiscal sector elements comprise government investment, government consumption, government transfers that are asymmetrically directed to both optimizing and hand-to-mouth households, cyclical unemployment benefits, foreign ownership of government debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. A particular finding is that having foreign-owned government debt generally breaks the Ricardian equivalence paradigm.
Keywords: small open economy, fiscal policy, fiscal rules, Bayesian estimation
JEL code: E0, E2, E3, F4, H2, H3, H6
Oļegs Tkačevs
ABSTRACT
This study investigates the impact of national fiscal rules on public investment policy. Using data of 35 OECD countries for the period 1995–2015, the paper provides evidence of a negative effect of expenditure rules on the level and share of government investment expenditure in total outlays, particularly in economic affairs. The effect of budget balance rules is less certain and seems to stem from those rules that do not explicitly exclude investment from the assessment. The coefficient estimates however imply a relatively low magnitude of the negative effect of fiscal rules. Overall, our paper suggests that, while loosening fiscal rules will not solve the problem of underinvestment, properly designed rules can help to protect public capital stock to some extent only.
Keywords: fiscal rules, government expenditure, public investment, panel analysis
JEL code: E62, H50, C23
Ludmila Fadejeva, Zeynep Kantur
ABSTRACT
We observe differences in the net wealth distribution by age among European countries. The net wealth distribution in Western EU countries is consistent with the life cycle hypothesis. However, in Eastern EU countries, the wealth distribution is skewed towards younger ages. The aim of the paper is twofold: first, we study the characteristics of economies leading to differences in the net wealth distribution by age; second, we evaluate the impact of these differences on the transmission of monetary policy. To do so, we develop a modified New Keynesian model where the demand side is represented by a multi-period overlapping generation setup, and the supply side of the economy follows the New Keynesian framework. The model is used to analyse the interaction between monetary policy and wealth accumulation originated by demographics and the productivity gap among generations in a coherent general equilibrium model. The HFCS database is used to calibrate the model for two groups of European countries. We find that the shape of net wealth distribution by age has an important bearing on the effectiveness and hence conduct of monetary policy.
Keywords: overlapping generations model, New Keynesian model, wealth distribution, monetary policy
JEL code: E32, E52, J11
Boriss Siliverstovs, Daniel S. Wochner
ABSTRACT
This paper re-examines the findings of Stock and Watson (2012b) who assessed the predictive performance of DFMs over AR benchmarks for hundreds of target variables by focusing on possible business cycle performance asymmetries in the spirit of Chauvet and Potter (2013) and Siliverstovs (2017a; 2017b; 2020). Our forecasting experiment is based on a novel big macroeconomic dataset (FRED-QD) comprising over 200 quarterly indicators for almost 60 years (1960–2018; see, e.g. McCracken and Ng (2019b)). Our results are consistent with this nascent state-dependent evaluation literature and generalize their relevance to a large number of indicators. We document systematic model performance differences across business cycles (longitudinal) as well as variable groups (cross-sectional). While the absolute size of prediction errors tend to be larger in busts than in booms for both DFMs and ARs, DFMs relative improvement over ARs is typically large and statistically significant during recessions but not during expansions (see, e.g. Chauvet and Potter (2013)). Our findings further suggest that the widespread practice of relying on full sample forecast evaluation metrics may not be ideal, i.e. for at least two thirds of all 216 macroeconomic indicators full sample rRMSFEs systematically over-estimate performance in expansionary subsamples and under-estimate it in recessionary subsamples (see, e.g. Siliverstovs (2017a; 2020)). These findings are robust to several alternative specifications and have high practical relevance for both consumers and producers of model-based economic forecasts.
Keywords: forecast evaluation, dynamic factor models, business cycle asymmetries, big macroeconomic datasets, US
JEL code: C32, C45, C52, E17
Andrejs Bessonovs, Oļegs Krasnopjorovs
ABSTRACT
This paper develops a Short-Term Inflation Projections (STIP) model, which captures cointegrated relationships between highly disaggregated consumer prices and their determinants. We document a significant pass-through of domestic labour costs, crude oil and global food commodity prices to consumer prices in Latvia. We also assess the model's forecast accuracy of Latvia's inflation during 2014–2018 and find that the STIP model statistically significantly outperforms a naïve benchmark model in real time.
Keywords: inflation forecasting, autoregressive distributed lag model, pass-through, oil prices, food commodity prices, labour costs
JEL code: C32, C51, C52, C53, E31