Table of Contents

Fiscal Consolidation Under Imperfect Credibility

Matthieu Lemoine, Banque de France
Jesper Lindé, Sveriges Riksbank - Research Division

The Distributional Consequences of Large Devaluations

Javier Cravino, University of California, Los Angeles
Andrei A. Levchenko, University of Michigan - Department of Economics, National Bureau of Economic Research (NBER)

A New ‘Preferred Habitat’ Yield Curve Parameter

Michael J Howell, University of London - Birkbeck,University of London

Does the Federal Reserve Have Private Information About its Future Actions?

Bedri Kamil Onur Taş, TOBB University of Economics and Technology

How to Stabilize the Banking System: Lessons from the London Money Market

Carolyn Sissoko, Independent


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Fiscal Consolidation Under Imperfect Credibility" Free Download
Banque de France Working Paper No. 595

MATTHIEU LEMOINE, Banque de France
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JESPER LINDÉ, Sveriges Riksbank - Research Division
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This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.

"The Distributional Consequences of Large Devaluations" Free Download
University of Zurich, UBS International Center of Economics in Society, Working Paper No. 15

JAVIER CRAVINO, University of California, Los Angeles
ANDREI A. LEVCHENKO, University of Michigan - Department of Economics, National Bureau of Economic Research (NBER)
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We study the differential impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Across product categories, the poor have relatively high expenditure shares in tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile.

"A New ‘Preferred Habitat’ Yield Curve Parameter" Free Download

MICHAEL J HOWELL, University of London - Birkbeck,University of London
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Since the GFC, the supply of US government bonds has grown significantly, involving large changes in the structure of Treasury debt. This has important implications because many investment funds target duration to immunize their liabilities, incentivised by shortfall risks and new legislation. This paper tries to incorporate these quantity and duration effects into existing term structure models using a new 4-factor decomposition comprising level, slope, curvature and position of the hump (D*) in the yield curve along the maturity/duration axis. D* is measured using US data to create a monthly time-series 1946-2015. This averages 6¼ years, with a 10-month standard deviation. In the absence of more granular data, this series may relate to the preferred habitat of investors and serve as another measure of their risk appetite, where low D* equates to high risk aversion. D* is a statistically significant predictor of economic activity and corporate credit spreads around one-year ahead and it allows a different interpretation of the 2007/08 Financial Crisis and Great Recession.

"Does the Federal Reserve Have Private Information About its Future Actions?" Fee Download
Economica, Vol. 83, Issue 331, pp. 498-517, 2016

BEDRI KAMIL ONUR TAŞ, TOBB University of Economics and Technology

This paper contributes to the ongoing debate about the existence and source of asymmetric information between the Federal Reserve and the public by examining the federal funds rate forecasts. It compares the Federal Reserve federal funds rate forecasts with the predictions of alternative forecasting models and forecasts from the futures market for federal funds. The results show that the Federal Reserve has superior information about its own future policy actions, the future federal funds rate. The results are robust to alternative specifications.

"How to Stabilize the Banking System: Lessons from the London Money Market" Free Download

CAROLYN SISSOKO, Independent
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This paper argues that the British financial system in the era prior to World War I provides modern policymakers with a successful model of how to stabilize the banking system. This model had two components: incentives were structured to ensure that all banks that originated or traded assets on the money market sought only to trade in high-quality assets, and macro-prudential regulation promoted the segregation of money markets from capital markets, monitored the growth of money market credit, and restricted trade on the money market in assets issued by entities and sectors whose money market liabilities were growing so fast that the most reasonable explanation was that the money market was being used to finance longer-term investment. These facts indicate that policymakers can successfully stabilize the banking system through a combination of structural reform and regulation of the growth of credit.

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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.

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MACROECONOMICS EJOURNALS

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Advisory Board

Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
National Bureau of Economic Research (NBER), Peter G. Peterson Institute for International Economics

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, National Bureau of Economic Research (NBER)