Table of Contents

Keynesian Inefficiency and Optimal Policy: A New Monetarist Approach

Stephen D. Williamson, University of Iowa - Henry B. Tippie College of Business - Department of Economics

Sand in the Wheels or Wheels in the Sand? Tobin Taxes and Market Crashes

Hynek Lavicka, Czech Technical University
Tomas Lichard, Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
Jan Novotny, City University London - Faculty of Finance, Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Inflation Securities Valuation with Macroeconomic-Based No-Arbitrage Dynamics

Gabriele Sarais, Imperial College London - Department of Mathematics
Damiano Brigo, Imperial College London - Department of Mathematics, Capco

The Political Economy of Sovereign Borrowing: Explaining the Policy Choices of Highly Indebted Governments

Stephen B. Kaplan, George Washington University - Department of Political Science, George Washington University - Institute For International Economic Policy (GWIIEP)
Kaj Thomsson, Maastricht University - Department of Economics

Liquidity Freezes Under Adverse Selection

José Jorge, Universidade do Porto, Faculdade de Economia
Charles M. Kahn, University of Illinois, Urbana-Champaign

Economic and Social Rights after the Global Financial Crisis

Aoife Nolan, University of Nottingham - School of Law


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Keynesian Inefficiency and Optimal Policy: A New Monetarist Approach" Free Download
FRB of St. Louis Working Paper No. 2014-009A

STEPHEN D. WILLIAMSON, University of Iowa - Henry B. Tippie College of Business - Department of Economics
Email:

A simple model of monetary/labor search is constructed to study Keynesian indeterminacy and optimal policy. In the model, economic agents have trouble splitting the surplus from exchange appropriately, and we consider monetary and fiscal policies that correct this Keynesian inefficiency. A Taylor rule does not imply determinacy, nor does it support an efficient outcome, in general. Optimal policies yield an efficient and determinate allocation of resources, but equilibrium policy actions, wages, and prices are indeterminate at the optimum.

"Sand in the Wheels or Wheels in the Sand? Tobin Taxes and Market Crashes" Free Download
CERGE-EI Working Paper Series No. 511

HYNEK LAVICKA, Czech Technical University
Email:
TOMAS LICHARD, Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
Email:
JAN NOVOTNY, City University London - Faculty of Finance, Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)
Email:

The recent crisis revived interest in financial transaction taxes (FTTs) as a means to offset negative risk externalities. However, up-to-date academic research does not provide sufficient insights into the effects of transaction taxes on financial markets as the literature has here-to-fore been focused too narrowly on Gaussian variance as a measure of volatility. In this paper, we argue that it is imperative to understand the relationship between price jumps, Gaussian variance, and FTTs. While Gaussian variance is not necessarily a problem in itself, the non-normality of return distribution caused by price jumps affects not only the performance of many risk-hedging algorithms but directly influences the frequency of catastrophic market events. To study the aforementioned relationship, we use an agent-based model of financial markets. Its results show that FTTs may increase the variance while decreasing the impact of price jumps. This result implies that regulators may face a trade-off between overall variance and price jumps when designing optimal tax. However, the results are not robust to the size of the artificial market as non-linearities emerge when the size of the market is increased.

"Inflation Securities Valuation with Macroeconomic-Based No-Arbitrage Dynamics" Free Download

GABRIELE SARAIS, Imperial College London - Department of Mathematics
Email:
DAMIANO BRIGO, Imperial College London - Department of Mathematics, Capco
Email:

We develop a model to price inflation and interest rates derivatives using continuous-time dynamics that have some links with macroeconomic monetary DSGE models equipped with a Taylor rule: in particular, the reaction function of the central bank, the bond market liquidity, inflation and growth expectations play an important role. The model can explain the effects of non-standard monetary policies (like quantitative easing or its tapering) and shed light on how central bank policy can affect the value of inflation and interest rates derivatives.

The model is built under standard no-arbitrage assumptions. Interestingly, the model yields short rate dynamics that are consistent with a time-varying Hull-White model, therefore making the calibration to the nominal interest curve and options straightforward. Further, we obtain closed forms for both zero-coupon and year-on-year inflation swap and options. The calibration strategy we propose is fully separable, which means that the calibration can be carried out in subsequent simple steps that do not require heavy computation. A market calibration example is provided.

The advantages of such structural inflation modelling become apparent when one starts doing risk analysis on an inflation derivatives book: because the model explicitly takes into account economic variables, a trader can easily assess the impact of a change in central bank policy on a complex book of fixed income instruments, which is normally not straightforward if one is using standard inflation pricing models.

"The Political Economy of Sovereign Borrowing: Explaining the Policy Choices of Highly Indebted Governments" Free Download
Institute for International Economic Policy Working Paper Series

STEPHEN B. KAPLAN, George Washington University - Department of Political Science, George Washington University - Institute For International Economic Policy (GWIIEP)
Email:
KAJ THOMSSON, Maastricht University - Department of Economics
Email:

In newly democratized and developing countries, political economy theory expects politicians to use budget deficits to engineer an election-timed boom, known as the political business cycle. In this paper, we challenge this view by incorporating the financial constraints faced by governments into an electoral political framework. Debtor governments must often borrow from foreign creditors to fund their domestic spending. Employing a formal model, we show theoretically that the extent of ownership dispersion among these creditors has an important effect on governments' economic policy autonomy. Based on our theoretical results, we argue when highly-indebted governments become more reliant on international bond markets – as opposed to traditional bank lending – politicians alter the way they respond to domestic constituents. These theoretical results find support in both quantitative and qualitative empirical findings. In an econometric test of 16 Latin American countries from 1961 to 2011, we show that the 1990's financial decentralization breeds austerity through its disciplining effect on fiscal policy. These results are consistent with case studies of recent elections in Southern European countries; there too we find that politicians exhibit greater fiscal discipline when they fund a greater share of their spending through decentralized bond markets. These findings have important scholarly implications, suggesting that governments' social responsiveness may in part reflect the structure of their international borrowing.

"Liquidity Freezes Under Adverse Selection" Free Download

JOSÉ JORGE, Universidade do Porto, Faculdade de Economia
Email:
CHARLES M. KAHN, University of Illinois, Urbana-Champaign
Email:

This paper analyses how adverse selection prevents liquidity from flowing from liquid to illiquid firms. Such market segmentation impairs the transmission mechanism of monetary policy, and requires specific policies to rebuild the liquidity channels throughout the economy. We show that the optimal policy requires a combination of contingent subsidies to promote ex ante insurance against liquidity shocks, and taxes on investment to alleviate moral hazard problems.

"Economic and Social Rights after the Global Financial Crisis" 
A. Nolan (ed.), Economic and Social Rights after the Global Financial Crisis (Cambridge: Cambridge University Press, 2014)

AOIFE NOLAN, University of Nottingham - School of Law
Email:

The global financial and economic crises have had a devastating impact on economic and social rights. These rights were ignored by economic policy makers prior to the financial and economic crisis and continue to be disregarded in the current ‘age of austerity’. This is the first book to focus squarely on the interrelationship between contemporary and historic economic and financial crises, the responses thereto, and the resulting impact upon economic and social rights. Chapters examine the obligations imposed by such rights in terms of domestic and supranational crisis-related policy and law, and argue for a response to the crises that integrates these human rights considerations. The expert international contributors, both academics and practitioners, are drawn from a range of disciplines including law, economics, development and political science. Featuring authors from Africa, the Americas and Europe, this collection is uniquely placed to address debates and developments from a range of disciplinary, geographical and professional perspectives.

^top

About this eJournal

This eJournal distributes working and accepted paper abstracts of empirical and theoretical papers on different aspects of monetary and fiscal policies. The topics in this eJournal include E1 and E6 from Section E of the classification system of the JEL.

Submissions

To submit your research to SSRN, sign in to the SSRN User HeadQuarters, click the My Papers link on left menu and then the Start New Submission button at top of page.

Distribution Services

If your organization is interested in increasing readership for its research by starting a Research Paper Series, or sponsoring a Subject Matter eJournal, please email: RPS@SSRN.com

Distributed by

Economics Research Network (ERN), a division of Social Science Electronic Publishing (SSEP) and Social Science Research Network (SSRN)

Directors

MACROECONOMICS EJOURNALS

MICHAEL C. JENSEN
Harvard Business School, Social Science Electronic Publishing (SSEP), Inc., National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: mjensen@hbs.edu

Please contact us at the above addresses with your comments, questions or suggestions for ERN-Sub.

Advisory Board

Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
Class of 1941 Professor of Economics, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER), International Monetary Fund (IMF)

JOHN Y. CAMPBELL
Morton L. and Carole S. Olshan Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

STEPHEN G. CECCHETTI
Professor of International Economics, Brandeis International Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)

BENJAMIN M. FRIEDMAN
William Joseph Maier Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

ROBERT E. HALL
Stanford University - The Hoover Institution on War, Revolution and Peace, National Bureau of Economic Research (NBER)

ROBERT E. LUCAS
John Dewey Distinguished Service Professor, University of Chicago - Department of Economics, National Bureau of Economic Research (NBER)

BENNETT T. MCCALLUM
Professor, Carnegie Mellon University - David A. Tepper School of Business, National Bureau of Economic Research (NBER)

ALLAN H. MELTZER
University Professor of Political Economics, Carnegie Mellon University - David A. Tepper School of Business

FREDERIC S. MISHKIN
Alfred Lerner Professor of Banking and Financial Institutions, Columbia Business School - Finance and Economics, National Bureau of Economic Research (NBER)

PAUL M. ROMER
National Bureau of Economic Research (NBER)

JULIO J. ROTEMBERG
Harvard University - Business, Government and the International Economy Unit, National Bureau of Economic Research (NBER)

MATTHEW D. SHAPIRO
Professor, University of Michigan at Ann Arbor - Department of Economics, Professor, National Bureau of Economic Research (NBER)

ROBERT J. SHILLER
Yale University - Cowles Foundation, National Bureau of Economic Research (NBER), Yale University - International Center for Finance

CHRISTOPHER A. SIMS
Princeton University - Department of Economics, National Bureau of Economic Research (NBER)

JOHN B. TAYLOR
Stanford University