Working Papers

Authors: Stephen Broadberry, John Wallis

Apr 2017

Abstract

Using annual data from the thirteenth century to the present, we show that improved long run economic performance has occurred primarily through a decline in the rate and frequency of shrinking, rather than through an increase in the rate of growing. Indeed, as economic performance has improved over time, the short run rate of growing has typically declined rather than increased. Most analysis of the process of economic development has hitherto focused on increasing the rate of growing. Here, we focus on understanding the forces making for a reduction in the rate of shrinking, drawing a distinction between proximate and ultimate factors. The main proximate factors considered are (1) structural change (2) technological change (3) demographic change and (4) the changing incidence of warfare. We conclude with a consideration of institutional change as the key ultimate factor behind the reduction in shrinking.

Reference: 154

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Authors: Stephen Broadberry, Jean-Pascal Bassino, Kyoji Fukao, Bishnupriya Gupta, Masanori Takashima

Apr 2017

Abstract

Japanese GDP per capita grew at an annual rate of 0.08 per cent between 730 and 1874, but the growth was episodic, with the increase in per capita income concentrated in two
periods, 1450-1600 and after 1721, interspersed with periods of stable per capita income. There is a similarity here with the growth pattern of Britain. The first countries to achieve modern economic growth at opposite ends of Eurasia thus shared the experience of an early end to growth reversals. However, Japan started at a lower level than Britain and grew more slowly until the Meiji Restoration.

JEL Codes: N10, N30, N35, O10, O57

Keywords: Japan, Great Divergence, GDP per capita, growth reversals, Britain

Reference: 156

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Authors: Francesco Zanetti, Philip Liu, Haroon Mumtaz and Konstantinos Theodoridis

Apr 2017

Abstract

This paper develops a change-point VAR model that isolates four major macroeconomic regimes in the US since the 1960s. The model identi es shocks to demand, supply, monetary
policy, and spread yield using restrictions from a general equilibrium model. The analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identi ed shocks. During the crisis period, spread shocks became more important for movements in unemployment and in ation. A counterfactual exercise evaluates the importance of lower bond-yield spread during the crises and suggests that the Fed's largescale asset purchases helped lower the unemployment rate by about 0.6 percentage points, while boosting in ation by about 1 percentage point.

JEL Codes: E42, E52

Keywords: change-point VAR model, global nancial crisis, large-scale asset purchases

Reference: 824

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Authors: Pablo Astorga Junquera

Mar 2017

Abstract

This paper discusses and documents a new dataset of real wages for unskilled, semi-skilled, and relatively skilled labour in Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela (LA-6) over the period 1900-2011. Three interrelated aspects are examined: the wage growth record associated with periods dominated by a particular development strategy; wage convergence across the LA-6; and changes in wage skill premiums and their links with fundamentals. The key findings are: i) the region’s unskilled wage rose by 147% in the period compared to rises of 243% in the average wage and 440% in income per worker (including both property and labour income); ii) there is a limited process of wage convergence across the LA-6; and weak persistence in the country hierarchy; iii) skill premiums tended to peak during the middle decades of the 20th century, coinciding with the acceleration of industrialisation and the timing of the demographic transition. Movements in the terms of trade are broadly associated with both fluctuations and trends in wage premiums, though the direction of the link is country and time specific.

JEL Codes: J31, O1, N36

Keywords: wage levels and differentials, economic development, Latin America

Reference: 153

Individual View

Authors: Francesco Zanetti, Masashige Hamano

Feb 2017

 

Abstract

How do product variety and quality affect the aggregate price bias? We develop a general equilibrium model that accounts for the joint interaction of product quality and variety. Our findings show that the aggregate price bias is pro-cyclical and the contribution of product variety is persistent whereas the contribution of product quality becomes counter-cyclical in the medium to long run. We show that accounting for product quality and variety has critical implications on the measure of cyclical fluctuations. Measurements of cyclical fluctuations derived using the consumption deflator, which abstracts from changes in product quality and variety, underestimate the variables' true volatility.

JEL Codes: D24, E23, E32, L11, L60

Keywords: Firm's entry and exit, product quality, product variety

Reference: 823

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Authors: Kevin Hjortshøj O'Rourke, Alan de Bromhead, Alan Fernihough, Markus Lampe

Feb 2017

Abstract

International trade became much less multilateral during the 1930s. Previous studies, looking at aggregate trade flows, have argued that discriminatory trade policies had comparatively little to do with this. Using highly disaggregated information on the UK’s imports and trade policies, we find that policy can explain the majority of Britain’s shift towards Imperial imports in the 1930s. Trade policy mattered, a lot.

JEL Codes: F13, F14, N74

Keywords: trade policy, interwar period

Reference: 152

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Authors: Michalis Rousakis, Romanos Priftis

Jan 2017

Abstract

This paper presents an analytical narration of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2015 and set Greece apart from other episodes of sovereign debt crises: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy environment along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption whilst reallocating it towards formal goods. As evidenced by the data capital controls mitigate the deposit ight and reinforce the switch of consumption to formality.

JEL Codes: E2, E4, F41, G11, G28

Keywords: Capital controls, small open economy, exit from a currency union, cash, informal economy, financial intermediaries, Greece

Reference: 822

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Authors: Agnes Kovacs, Orazio Attanasio, Krisztina Molnar

Jan 2017

Abstract

In this paper, we make three substantive contributions: first, we use elicited subjective income expectations to identify the levels of permanent and transitory income shocks in a life-cycle framework; second, we use these shocks to assess whether households' consumption is insulated from them; third, we use the shock data to estimate an Euler equation for consumption. We find that households are able to smooth transitory shocks, but adjust their consumption in response to permanent shocks, albeit not fully. The estimates of the Euler equation parameters with and without expectational errors are similar, which is consistent with rational expectations. We break new ground by combining data on subjective expectations about future income from the Michigan Survey with micro data on actual income from the Consumer Expenditure Survey.

JEL Codes: C13; D12; D84; D91; E21

Keywords: life cycle models, estimating Euler Equations, survey expectations

Reference: 820

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Authors: Gregori Galofré-Vilà, Andrew Hinde and Aravinda Guntupalli

Jan 2017

 

Abstract

This paper uses a dataset of heights calculated from the femurs of skeletal remains to explore the development of stature in England across the last two millennia. We find that heights increased during the Roman period and then steadily fell during the ‘Dark Ages’ in the early medieval period. At the turn of the first millennium heights grew rapidly, but after 1200 they started to decline coinciding with the agricultural depression, the Great Famine and the Black Death. Then they recovered to reach a plateau which they maintained for almost 300 years, before falling on the eve of industrialisation. The data show that average heights in England in the early nineteenth century were shorter than those in Roman times, and that average heights reported between 1400 and 1700 were similar to those of the twentieth century. The paper also discusses the ssociation of heights across time with some potential determinants and correlates (real wages, inequality, food supply, climate change and expectation of life), showing that in the long run heights change with these variables, and that in certain periods, notably the thirteenth and fourteenth centuries, the associations are observable over the shorter run as well. We also examine potential biases surrounding the use of skeletal remains.

Keywords: Health, Height, England, Skeletal remains

Reference: 151

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Authors: H Peyton Young, Mark Paddrik, Sriram Rajan

Jan 2017

Abstract

This paper analyzes counterparty exposures in the credit default swaps market and examines the impact of severe credit shocks on the demand for variation margin, which are the payments that counterparties make to offset price changes. We employ the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) shocks and estimate their impact on the value of CDS contracts and the variation margin owed. Large and sudden demands for variation margin may exceed a firm's ability to pay, leading some firms to delay or forego payments. These shortfalls can become amplified through the network of exposures. Of particular importance in cleared markets is the potential impact on the central counterparty clearing house. Although a central node according to conventional measures of network centrality, the CCP contributes less to contagion than do several peripheral firms that are large net sellers of CDS protection. During a credit shock these firms can suffer large shortfalls that lead to further shortfalls for their counterparties, amplifying the initial shock.

JEL Codes: D85, G01, G17, L14

Keywords: Credit default swaps, stress testing, systemic risk, financial networks

Reference: 821

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Authors: James Duffy, David Hendry

Jan 2017

 

Abstract

Data spanning long time periods, such as that over 1860–2012 for the UK, seem likely to have substantial errors of measurement that may even be integrated of order one, but which are probably cointegrated for cognate variables. We analyze and simulate the impacts of such measurement errors on parameter estimates and tests in a bivariate cointegrated system with trends and location shifts which reflect the many major turbulent events that have occurred historically. When trends or shifts therein are large, cointegration analysis is not much affected by such measurement errors, leading to conventional stationary attenuation biases dependent on the measurement-error variance, unlike the outcome when there are no offsetting shifts or trends.

JEL Codes: C51, C22

Keywords: Integrated Measurement Errors; Location Shifts; Long-run Data; Cointegration

Reference: 818

Individual View

Authors: Kevin Hjortshøj O'Rourke

Jan 2017

 

Abstract

This paper surveys independent Ireland’s economic policies and performance. It has three main messages. First, the economic history of post-independence Ireland was not particularly unusual. Very often, things that were happening in Ireland were happening elsewhere as well. Second, for a long time we were hampered by an excessive dependence on a poorly performing UK economy. And third, EC membership in 1973, and the Single Market programme of the late 1980s and early 1990s, were absolutely crucial for us. Irish independence and EU membership have complemented each other, rather than being in conflict: each was required to give full effect to the other. Irish independence would not have worked as well for us as it did without the EU; and the EU would not have worked as well for us as it did without political independence.

JEL Codes: N14, N74

Keywords: Ireland, economic history, trade policies, growth, Brexit

Reference: 150

Individual View

Authors: Avner Offer

Jan 2017

Social democracy and market liberalism offered different solutions to the same problem: how to provide for life-cycle dependency. Social democracy makes lateral transfers from producers to dependents by means of progressive taxation. Market liberalism uses financial markets to transfer financial entitlement over time. Social democracy came up against the limits of public expenditure in the 1970s. The ‘market turn’ from social democracy to market liberalism was enabled by easy credit in the 1980s. Much of this was absorbed into homeownership, which attracted majorities of households (and voters) in the developed world. Early movers did well, but easy credit eventually drove house prices beyond the reach of younger cohorts. Debt service diminished effective demand, which instigated financial instability. Both social democracy and market liberalism are in crisis.

JEL Codes: H55, E51, R21, R31

Keywords: Welfare state, housing, credit and debt

Reference: 149

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Authors: Fedrico Torrachi

Jan 2017

I examine the impact of credit supply conditions on the labor market via a bank credit channel. Using a Bayesian likelihood approach with US data, I build and estimate a New-Keynesian dynamic stochastic general equilibrium model that incorporates a labor market with search frictions and a banking sector subject to moral hazard. Including a banking sector improves the empirical fit with the data. Financial frictions amplify the response of TFP shocks and add persistence to exogenous disturbances. Financial intermediaries’ net worth plays a crucial role in the transmission of aggregate shocks. The banking sector is also a crucial source of business cycle fluctuations. Shocks to the net worth of the banking sector drive the volatility of labor market tightness, the unemployment rate, and the vacancy stock.

JEL Codes: E24, E32, E37, E43, E44, J20

Keywords: Financial Intermediation, Banking Sector, Labor Market Frictions, DSGE, Bayesian Estimation

Reference: 817

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Authors: John Knight, LI Shi, WAN Haiyuan

Dec 2016

The inequality of wealth in China has increased rapidly in recent years. Prior to 1978 all Chinese households possessed negligible wealth. China therefore presents a fascinating case study of how inequality of household wealth increases as economic reform takes place, marketisation occurs, and capital accumulates. Wealth inequality and its growth are measured and decomposed using data from two national sample surveys of the China Household Income Project (CHIP) relating to 2002 and 2013. Techniques are devised and applied to measure the sensitivity of wealth inequality to plausible assumptions about under-representation of and under-reporting by the wealthy. An attempt is made to explain the rising wealth inequality in terms of the relationships between income and wealth, house price inflation, differential saving, and income from wealth.

JEL Codes: C80; D31

Keywords: China; wealth inequality and its decomposition; top-tail income c

Reference: 816

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Authors: Guido Ascari, Louis Phaneuf, Eric Sims

Dec 2016

Recent empirical evidence identfi es investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profi les of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary eff ect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model - namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specifi c technologies - can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the eff ects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.

JEL Codes: E31, E32

Keywords: Investment shocks, Business cycle comovements, Standard household preferences, Monopolistic competition, Wage and price contracting, Intermediate inputs, Trend output growth, Trend inflation

Reference: 815

Individual View

Authors: James Forder

Dec 2016

Abstract

It is widely accepted that the importance of Friedman’s Presidential Address to the American Economic Association lies in its criticism of policy based on the Phillips curve. It is argued that a reading of the text does not support such a view, and this and other considerations suggest that any such aim was far from Friedman’s mind in 1968. His objective was the quite different one of making a case for policy ‘rules’ rather than discretion.

JEL Codes: B22, B31, E58

Keywords: Milton Friedman; rules and discretion; expectations; Phillips curve

Reference: 814

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Authors: Francesco Zanetti, Wei Li

Nov 2016

This paper uses VAR analysis to identify monetary policy shocks on U.K. data using surprise changes in the policy rate as external instruments and imposing block exogeneity restrictions on domestic variables to estimate parameters from the viewpoint of the domestic economy. The results show large and persistent effects of monetary policy shocks on the domestic economy and point to the critical role of exchange rates and term premia. The analysis resolves important empirical puzzles of traditional recursive identification methods.

JEL Codes: E44, E52, F41

Keywords: Monetary Policy Transmission, Structural VAR, Small Open Economy, External Instruments Identification

Reference: 812

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Authors: Francesco Zanetti, Christoph Görtz, John D. Tsoukalas

Nov 2016

We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a signicant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, it is striking that VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector of the Gertler-Kiyotaki-Karadi type generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplication of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations.

JEL Codes: E2, E3

Keywords: News shocks, Business cycles, DSGE, VAR, Bayesian estimation

Reference: 813

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Authors: John Muellbauer

Nov 2016

The failure of the ubiquitous New Keynesian "Dynamic Stochastic General Equilibrium" (NK-DSGE) models to capture interactions of finance and the real economy is widely-recognized since the 2008-9 financial crisis. NK-DSGE models exclude money, debt and asset prices and, importantly, ignore changing credit markets. These problems stem from assuming unrealistic micro-foundations for household behaviour, and that aggregate behaviour mimics a fully-informed representative agent (both assumptions are embodied in the underlying rational expectations permanent income' hypothesis (REPIH). This survey critiques the NK-DSGE models and its integral REPIH model, and discusses alternative post-crisis general equilibrium models which do incorporate debt and allow crises to occur. But neither model type can be directly applied to policy-making. The survey reviews misspecifications in standard non-DSGE macro-models used by central banks (e.g. the Fed.'s FRB-US), and related co-integration literature linking consumption with household portfolios. These too omit most of the 'financial accelerator', ignoring credit shifts and crucially, aggregating liquid, illiquid assets, debt and housing into a single 'net worth' construct. The survey's second focus is to improve non-DSGE models for policy using the Latent Interactive Variable Equation System (LIVES) approach, in which aggregate consumption is jointly modelled with the main elements of household balance sheets, extracting credit conditions as a latent variable. Empirical work on aggregate data is surveyed revealing the important role of debt and financial assets and the time and context-dependent role of housing collateral. Rather than 'one-size-fits-all' monetary and macro-prudential policy, institutional differences between countries then imply major differences for monetary policy transmission and policy.

JEL Codes: E17, E21, E44, E51, E52, E58, G01

Keywords: DSGE, macroeconomic policy models, finance and the real economy, financial crisis, consumption, credit constraints, household portfolios, asset prices

Reference: Paper 811

Individual View

The large span of long-run projected temperature changes in climate projections does not predominately originate from uncertainty across climate models; instead it is the wide range of different global socio-economic scenarios and the implied energy production that results in high uncertainty about climate change. It is therefore important to assess the observational tracking of these scenarios. For the first time observations over two decades are available against which the initial sets of socio-economic scenarios used in IPCC reports can be assessed. Here we compare these socio-economic scenarios created in both 1992 and 2000 against the recent observational record to investigate the coupling of economic growth and fossil-fuel CO2 emissions. We find that the growth rate in fossil fuel CO2 emission intensity – fossil fuel CO2 emissions per GDP – over the 2000s exceeds the projections of all main emission scenarios. Proposing a method to disaggregate differences in global growth rates to country-by-country contributions, we find that the relative discrepancy is driven by high growth rates in Asia and Eastern Europe, in particular in Russia and China. The growth of emission intensity over the 2000s highlights the relevance of unforeseen local shifts in projections on a global scale.

JEL Codes: Q40, Q47, Q54

Keywords: Climate, Energy, Scenarios, Emission Intensity

Reference: 810

Individual View

Economic policy agencies accompany forecasts with narratives, a combination we call foredictions, often basing policy changes on developments envisaged. Forecast failure need not impugn a forecasting model, although it may, but almost inevitably entails forediction failure and invalidity of the associated policy. Most policy regime changes involve location shifts, which can induce forediction failure unless the policy variable is super exogenous in the policy model. We propose a step-indicator saturation test to check in advance for invariance to policy changes. Systematic forecast failure, or a lack of invariance, previously justified by narratives reveals such stories to be economic fiction.

JEL Codes: C51, C22

Keywords: Forediction; Invariance; Super exogeneity; Indicator saturation; Co-breaking; Autometrics

Reference: 809

Individual View

Authors: Alexei Parakhonyak, Nick Vikander

Oct 2016

This paper shows that a rm may benefit from restricting capacity so as to trigger herding behavior from consumers, in situations where such behavior is otherwise unlikely. We consider a setting with social learning, where consumers observe sales from previous cohorts and update beliefs about product quality before making their purchase. A capacity constraint directly limits sales but also results in coarser information: upon observing a sellout, consumers attach positive probability to all levels of demand that exceed the constraint. The resulting discrete jump in beliefs following a sellout benefits the firm, and can make it optimal to restrict capacity.

JEL Codes: D82, D83, L15

Keywords: Capacity Constraints, Herding, Informational Cascades

Reference: 808

Individual View

Authors: Alexei Parakhonyak, Maria Titova

Oct 2016

Abstract:

We consider a general model of a market for differentiated goods, in which firms are located in marketplaces: shopping malls or platforms. There are search frictions between the marketplaces, but not within them. Marketplaces differ in their size. We show that consumers prefer to start their search from the largest marketplace and continue in the descending order of their size. We show that the descending search order is the only search order which can be a part of an equilibrium for any market cofiguration. Despite charging lower prices, firms at larger marketplaces earn higher profits, and under free entry all firms cluster at one place. If a marketplace determines the price of entry, the equilibrium marketplace size depends negatively on search costs.

JEL Codes: D43, D83, L13

Keywords: Shopping Malls, Consumer Search, Platforms

Reference: 807

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Authors: Brian A'Hearn, Alexia Delfino, Alessandro Nuvolari

Oct 2016

A swelling stream of literature employs age-heaping as an indicator of human capital, more specifically of numeracy. We re-examine this connection in light of evidence drawn from nineteenth century Italy: census data, death records, and direct, qualitative evidence on age-awareness and numeracy. Though it can stand in as an acceptable proxy for literacy, our findings suggest that age-heaping is most plausibly interpreted as a broad indicator of cultural and institutional modernisation rather than a measure of cognitive skills.

JEL Codes: N33, J24

Keywords: Age-Heaping, Numeracy, Human capital, Italy

Reference: Paper 148

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