Table of Contents

On the Predictability of Narrative Fiscal Adjustments

Pablo Hernández de Cos, Banco de Espana
Enrique Moral-Benito, Bank of Spain, Universidad Carlos III de Madrid

Lack of Confidence, the Zero Lower Bound, and the Virtue of Fiscal Rules

Sebastian Schmidt, European Central Bank (ECB)

Real Estate Markets and Macroprudential Policy in Europe

Philipp Hartmann, European Central Bank (ECB), Centre for Economic Policy Research (CEPR) - International Macroeconomics

Has the Publication of Minutes Helped Markets to Predict the Monetary Policy Decisions of the Bank of England's MPC?

Makram El-Shagi, University of Mannheim
Alexander Jung, European Central Bank (ECB) - Directorate General Economics

Banking and Currency Crises: Differential Diagnostics for Developed Countries

Mark Joy, Bank of England
Marek Rusnak, Czech National Bank (CNB), Charles University in Prague
Katerina Smidkova, Czech National Bank (deceased), Charles University - Economics Department (deceased)
Borek Vasicek, Czech National Bank (CNB), Autonomous University of Barcelona - Department of Applied Economics

The Relationship between Structural and Cyclical Features of the EU Financial Sector

Hanno Stremmel, WHU - Otto Beisheim School of Management
Balazs Zsamboki, European Central Bank (ECB)

The Risk Management Approach to Monetary Policy, Nonlinearity and Aggressiveness: The Case of the US Fed

Diego Moccero, European Central Bank (ECB)
Jean-Yves Gnabo, Facultés Universitaires Notre-Dame de la Paix (FUNDP)


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"On the Predictability of Narrative Fiscal Adjustments" Free Download
Banco de Espana Working Paper No. 1516

PABLO HERN?NDEZ DE COS, Banco de Espana
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ENRIQUE MORAL-BENITO, Bank of Spain, Universidad Carlos III de Madrid
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In an influential paper, Devries et al. (2011) construct narrative series of tax- and spending-based fiscal adjustments for a panel of OECD countries. In this paper, we find that the adjustments based on spending cuts can be predicted on the basis of past output growth and other macroeconomic variables. Moreover, we illustrate that this source of endogeneity may generate significant differences in the estimated multipliers.

"Lack of Confidence, the Zero Lower Bound, and the Virtue of Fiscal Rules" Free Download
ECB Working Paper No. 1795

SEBASTIAN SCHMIDT, European Central Bank (ECB)
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In the presence of the zero lower bound, standard business cycle models with a Taylor-type monetary policy rule are prone to equilibrium multiplicity. A drop in confidence can drive the economy into a liquidity trap without any change in fundamentals. Using a prototypical sticky-price model, I show that Ricardian fiscal spending rules that prevent real marginal costs from declining in the face of a confidence shock insulate the economy from such expectations-driven liquidity traps.

"Real Estate Markets and Macroprudential Policy in Europe" Free Download
ECB Working Paper No. 1796

PHILIPP HARTMANN, European Central Bank (ECB), Centre for Economic Policy Research (CEPR) - International Macroeconomics
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Boom-bust cycles in real estate markets have been major factors in systemic financial crises and therefore need to be at the forefront of macroprudential policy. The geographically differentiated nature of real estate market fluctuations implies that these policies need to be granular across regions and countries. Before the financial crisis that started in 2007 property markets were overvalued in a range of European countries, but much like in other constituencies active policies addressing this were an exception. An increasing number of studies suggest that borrower-based regulatory policies, such as reductions in loan-to-value or debt-to-income limits, can be effective in leaning against real estate booms. But many of the new macroprudential policy authorities in Europe do not have clear powers to determine them. Moreover, the cross-border spillovers they may give rise to suggest the establishment of a well-defined macroprudential coordination mechanism for the single European market.

"Has the Publication of Minutes Helped Markets to Predict the Monetary Policy Decisions of the Bank of England's MPC?" Free Download
ECB Working Paper No. 1808

MAKRAM EL-SHAGI, University of Mannheim
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ALEXANDER JUNG, European Central Bank (ECB) - Directorate General Economics
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This paper examines whether the minutes of the Bank of England’s Monetary Policy Committee (MPC) have provided markets with additional information about the future course of monetary policy. The paper conducts an econometric approach based on an Ordered Probit model explaining future policy rate changes (sample 1998 to 2014), and the Vuong test for model selection, which helps to identify changes in the market assessment around the release of MPC minutes. Our results suggest that the Bank of England’s published minutes of the MPC’s deliberations have indeed helped markets in forming their expectations on future monetary policy decisions.

"Banking and Currency Crises: Differential Diagnostics for Developed Countries" Free Download
ECB Working Paper No. 1810

MARK JOY, Bank of England
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MAREK RUSNAK, Czech National Bank (CNB), Charles University in Prague
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KATERINA SMIDKOVA, Czech National Bank (deceased), Charles University - Economics Department (deceased)
BOREK VASICEK, Czech National Bank (CNB), Autonomous University of Barcelona - Department of Applied Economics
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We identify a set of “rules of thumb? that characterise economic, financial and structural conditions preceding the onset of banking and currency crises in 36 advanced economies over 1970-2010. We use the Classification and Regression Tree methodology (CART) and its Random Forest (RF) extension, which permits the detection of key variables driving binary crisis outcomes, allows for interactions among key variables and determines critical tipping points. We distinguish between basic country conditions, country structural characteristics and international developments. We find that crises are more varied than they are similar. For banking crises we find that low net interest rate spreads in the banking sector and a shallow or inverted yield curve are their most important forerunners in the short term, whereas in the longer term it is high house price inflation. For currency crises, high domestic short-term rates coupled with overvalued exchange rates are the most powerful short-term predictors. We find that both country structural characteristics and international developments are relevant banking crisis predictors. Currency crises, however, seem to be driven more by country idiosyncratic, short-term developments. We find that some variables, such as the domestic credit gap, provide important unconditional signals, but it is difficult to use them as conditional signals and, more importantly, to find relevant threshold values.

"The Relationship between Structural and Cyclical Features of the EU Financial Sector" Free Download
ECB Working Paper No. 1812

HANNO STREMMEL, WHU - Otto Beisheim School of Management
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BALAZS ZSAMBOKI, European Central Bank (ECB)
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In this study, we explore the relationship between certain structural features of the banking sectors in EU Member States and the performance of the respective banking sectors over the financial cycle. Using the financial cycle indicator developed by Stremmel (2015), we estimate the impact of the structural features of the banking sector on the amplitude of the financial cycle. Our results suggest that the concentration of the banking sector, the share of foreign banks, the size and stability of financial institutions, the share of foreign currency loans and financial inter-linkages contribute to the amplitude and hence the variability of financial cycles. This study provides important insights into the appropriate design of various structural and cyclical policy instruments as well.

"The Risk Management Approach to Monetary Policy, Nonlinearity and Aggressiveness: The Case of the US Fed" 
ECB Working Paper No. 1792

DIEGO MOCCERO, European Central Bank (ECB)
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JEAN-YVES GNABO, Facultés Universitaires Notre-Dame de la Paix (FUNDP)
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We estimate regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: i) risk in the inflation outlook and volatility in financial markets are a powerful driver of monetary policy regime changes in the U.S.; ii) the response of the US Fed to the inflation outlook is invariant across policy regimes; iii) however, in periods of high economic risk, monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and begging of the 1990s, and in the late 1990s and early 2000s.

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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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Advisory Board

Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

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)