We show that three factors combine to explain the mean magnitude of excess sensitivity reported in studies estimating the consumption response to income changes: the use of macro data, publication bias, and liquidity constraints. When micro data are used, publication bias is corrected for, and households under examination have substantial liquidity, the literature implies little evidence of deviations from consumption smoothing. The result holds when we control for 45 additional variables reflecting the methods employed by researchers and use Bayesian model averaging to account for model uncertainty. The estimates produced by this literature are also systematically affected by the size of the change in income and the chosen measure of consumption.
The paper proposes a bootstrap methodology for estimating cost efficiency in data envelopment analysis. We consider the conventional concept of Fare, Grosskopf and Lovellcost efficiency, for which our algorithm re-samples “naive” input-oriented efficiency scores, rescales original inputs to bring them to the frontier, and then re-estimates cost efficiency scores for the rescaled inputs. Next, we examine Tone cost efficiency, where input prices vary across producers. Here we show that the direct modification on bootstrap algorithms by Simar and Wilson are applicable. We consider cases both with the absence and presence of environmental variables (i.e. input variables not directly controlled by firms). The bootstrap methodology exploits these assumptions: 1) the sample are i.i.d. random variables with the continuous joint probability density function with support over production set; 2) the frontier is smooth; and 3) the probability of observing firms on the frontier approaches unity with an increase in sample. The results of simulations for a multi-input, multi-output Cobb–Douglas production function with correlated outputs, and correlated technical and cost efficiency, show consistency of our proposed algorithm, even for small samples. Finally, we offer real data estimates for the Japanese banking industry in 2013. Our package “rDEA,” developed in the R language, is available from the GitHub and CRAN repository.
Based on quarterly data on 31 emerging countries (among which 16 are inflation targeting countries) from 1990Q1 to 2014Q3, we obtain a strong support for the conjecture that the implementation of inflation targeting weakens the Fisherian relation between expected depreciation and the interest rate differential (uncovered interest parity condition) and thus is conducive to the appearance of the forward bias puzzle in emerging countries. We show that this reflects the performance of inflation targeting regimes in lowering the level and volatility of inflation. Our finding holds when controlling for countryspecific effects, time-specific effects, global disinflation, exchange rate management, crises, and using different econometric techniques.
This note discusses two errors in the approach proposed in Canay (2011) for constructing a computationally simple two-step estimator in a quantile regression model with quantile-independent fixed effects. Firstly, we show that Canay’s assumption about n/Ts → 0 for some s > 1 is not strong enough and can entail severe bias or even the non-existence of the limiting distribution for the estimator of the vector of coefficients. The condition n/T → 0 appears to be closer to the required set of restrictions. These problems are likely to cause incorrect inference in applied papers with large n/T, but the impact is less in applications with small n/T. In an attempt to improve Canay’s estimator, we propose a simple correction that may reduce the bias. The second error concerns the incorrect asymptotic standard error of the estimator of the constant term. We show that, contrary to Canay’s assumption, the within estimator has an influence function that is not i.i.d. and this affects inference. Moreover, the constant term is unlikely to be estimable at rate nT−−−√nT, so a different estimator may not be available. However, the issue concerning the constant term does not have an effect on slope coefficients. Finally, we give recommendations to practitioners and conduct a meta-review of applied papers that use Canay’s estimator.
In this paper, we propose a two-sector endogenous growth model of transition from the period of pre-industrial stagnation to a sustainable growth regime. In the model the slight structural changes in the Malthusian world influence a proportion of power distribution between landowners and capitalists, and finally lead to the adoption of institutions, favoring industrial development. These changes trigger the non-drastic transition to the modern growth regime. The model can explain the dynamic and the intensity of conflict between landowners and capital holders during the transition process.
Stability of inflation expectations is a necessary part of inflation targeting. Among many factors that may affect the dynamics of inflation expectations, one of the most important is the communication policy of the central bank and representatives of the government. This paper measures the effectiveness of verbal interventions by the Government and the Bank of Russia on the high-frequency indicator of inflation expectations from the stock market for the period July 2015 – December 2016. Dummy variables are used to characterize verbal interventions in terms of the degree of regularity, the source and the information contained. One of the main features of this paper is the analysis of the verbal interventions from individual representatives of monetary and fiscal policies. By the assessment of the model of conditional heteroscedasticity, we conclude that verbal interventions by the Bank of Russia and members of the Government of the Russian Federation accompanied by decrease of inflation expectations: key verbal interventions were statements about state budget deficit and future inflation. The results obtained can be used to develop the communication policy tools in future.
In the aftermath of 2007—2009 global financial crisis, many economies had stuck in a liquidity trap. This stance forced central banks to implement various unconventional monetary policies, including massive purchases of financial assets, cutting policy rates down into the negative zone and reliance on forward guidance. In this paper we critically discuss these policy measures. Unconventional policy success in overcoming a liquidity trap heavily depends on the ability to manage private agents’ expectations. If the central bank is capable to form expectations of low interest rates for a prolonged period after the escape from a liquidity trap, unconventional monetary policies lead to a recovery. Another crucial issue is dynamic inconsistency of prolonged low interest rate policy. We discuss several ways of how the central bank can commit not to lift policy rate up to keep inflation unnecessary low.
The paper contrasts the drivers of mergers and acquisitions in Russia and other countries. Using the results of CEO surveys and surveys of the participants of the M&A markets in Russia and globally, the author compares the most prevalent strategies for company growth and restructuring. The paper points to economic evidence that insufficient development of competition and various issues in corporate finance may be linked to a relatively low predominance of M&A deals in Russia. In particular, this relates to the lack of deals, aimed at acquiring assets of the target. At the same time, the data for the Russian M&A market in 2014–2018 indicates relatively high competition in the information technology, and a growth in the number and the total value of M&A deals in this sector. Additionally, the overall Russian M&A market demonstrates a decrease in the average deal value, and there is a steady fall in the share of the oil and gas sector.
We investigate the consequences of excessive international debt overhang as they relate to both debtor and creditor countries. In particular, we assess the impact of monetary policy on financial stability and how it can be used to smooth borrowers, as well as creditors, consumption over the business cycle. Based on [Goodhart, Peiris, Tsomocos, 2018], we establish that an independent countercyclical monetary policy, that contracts liquidity whenever debt grows whereas it expands it when default rises, reduces volatility of consumption. In effect, monetary policy provides an extra degree of freedom to the policymaker. We implement our approach to the Czech and Eurozone area economies during the 1990s. In our model, we introduce endogenous default ά la [Shubik, Wilson, 1977], whereby debtors incur a welfare cost in renegotiating their contractual debt obligations that is commensurate to the level of default. However, this cost depends explicitly on the business cycle and it should be countercyclical. Hence, contractionary monetary policy reduces the volume of trade and efficiency, thus increasing default. This occurs as the default cost increases the associated default accelerator channel engenders higher default rates. On the other hand, lower interest rates increase trade efficiency and, consequently, reduce the amplitude of the business cycle and benefit financial stability. In sum, the appropriate design of monetary policy complements financial stability policy. The modeling of endogenous default allows us to study the interaction of monetary and macroprudential policy.
Stabilizing monetary policy in a small open economy is constrained by the open economy trilemma. In this paper we investigate whether foreign exchange market interventions and the Central Bank’s credit rationing at the official rate (CROR) may soften this constraint and improve the results of monetary policy for different monetary regimes. We construct a DSGE model appropriate for analysing the forward-looking behaviour of households facing non-zero probabilities of losing access to financial market and CROR.
We have found significant credit rationing in the quarterly Russian data of 2001:Q1–2014:Q2. The probability of losing access to financial market and the probability of CROR are estimated as 22% and 66%, respectively. Using Russian data of 2001:Q1–2014:Q2 we demonstrate that CROR provoked forward-looking activity in financial market, which led to more Ruble devaluation in the crises of 2008-2009. It improved poor countercyclical performance of two Russian monetary policy rules, whereas made small effect on welfare. Welfare maximization exercises reveal a trade off between low-inflation and high-welfare solutions and favour of a floating exchange rate regime. We found the optimal value of the probability of CROR in both exchange rate-based and Taylor rule-based models but resulting improvement in welfare is very small.
We propose a new method of Bayesian identification of a structural vector autoregression based on the Bayesian model averaging. As compared to the literature on Bayesian SVAR averaging, the proposed algorithm can identify not only recursive, but also cyclical models given that some conditions specified in the paper hold. Bayesian model selection is made within the set of distinguishable on data models. We use simulations to assess the performance of the algorithm. We also check sensitivity of the proposed algorithm with respect to true parameter values, number of observations, and with respect to the parameters of prior distribution.
This paper measures the effects of the Russian Government and the Bank of Russia’s verbal interventions on the USD/RUB exchange rate. To take into account the verbal interventions by the Bank of Russia, we analyze the announcements made by the members of its Board of Directors and by the press-service. Concerning the communication policy of the Government, we search for the announcements by the President of the Russian Federation, the representatives of the President Administration and the members of the Government of the Russian Federation. The analysis of the verbal interventions from 2014 to 2016 reveals the main characteristics of the information policy of the Russian authorities. For example, the most announcements by the representatives of the Bank of Russia contain positive information about financial stability, while the most announcements by the Government representatives refer to the GDP dynamics. The information policy about the inflation dynamics is consistent among different policy authorities. The representatives of both the Bank of Russia and the Government have published the same number of announcements with similar content. In order to reveal the relationship between verbal interventions and the ruble exchange rate, we use daily data and estimate an ARMA(0,0)-GARCH(1,1) model. According to the results, the returns of the USD/RUB exchange rate were higher when the Bank of Russia communicated lower inflation risks and higher RUB devaluation in 2014-2016. The USD/RUB returns were also higher when the representatives of the Russian Government announced the higher exchange rate volatility and the higher deficit. The days when the Russian Government communicated higher inflation risks or stricter fiscal policy were characterized by lower USD/RUB returns.
After the recent debt crisis governments of many developed and developing countries turned to the use of financial repression as a way of government spending financing along with explicit capital taxation. Financial repression can be considered as an implicit tax on capital, because it leads to the outflow of resources from investment to the government debt. We question what type of government spending financing is better: explicit or implicit tax on capital (financial repression). The criterion is the minimization of consumption crowding out effect in the steady-state where government spending can be of three types. We propose a Ramsey model modification with financial repression and three types of government expenditures: wasteful, productive and one in the utility. There are two instruments of financial repression: artificial increase in debt demand and lowered government debt yield. We find that regardless of government spending type, the choice of the government, which guarantees maximum level of consumption or minimum crowding out in the steady state, is explicit tax on capital in the absence of financial repression (in the form of artificial increase in debt demand). The higher is artificial debt demand the bigger is the direct outflow of capital to the government debt and less is the average interest of savings, while increase in the explicit capital tax rate affects only the savings yield. However, increase in the explicit tax on capital and lowering debt yield leads to the same crowding out effect.