Table of Contents

Measuring the Spillovers of Uncertainty Shocks

Maria T. Gonzalez-Perez, Universidad Complutense de Madrid - Colegio Universitario de Estudios Financieros (CUNEF)

On Money as a Medium of Exchange in Near-Cashless Credit Economies

Ricardo Lagos, New York University (NYU) - Department of Economics
Shengxing Zhang, London School of Economics (LSE) - Department of Economics

The Fiscal Roots of Inflation

John H. Cochrane, Hoover Institution, National Bureau of Economic Research (NBER), University of Chicago - Booth School of Business

Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System: How Much is Too Much?

Nellie (Yinan) Zhang, Government of Canada - Bank of Canada

The Great Recession, Austerity and Inequality: Lessons from Ireland

M. Savage, Economic and Social Research Institute (ESRI)
T. Callan, Economic and Social Research Institute (ESRI)
B. Nolan, University of Oxford - Institute for New Economic Thinking at the Oxford Martin School
B. Colgan, VU Amsterdam


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Measuring the Spillovers of Uncertainty Shocks" Free Download

MARIA T. GONZALEZ-PEREZ, Universidad Complutense de Madrid - Colegio Universitario de Estudios Financieros (CUNEF)
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This article studies the spillovers of uncertainty shocks priced (and transmitted) in stock index options quotes in Europe from 2001 to 2018, focusing on the financial crisis, the EU sovereign debt crisis, and the Brexit periods. We estimate two spillover indices (for European and European Monetary Union markets) using the log-ratio of leading European volatility indices in a VAR framework, following Diebold & Yilmaz (2012), and study their dynamics. First, we find evidence of the ability of options markets to price uncertainty shocks resulting from political, economic and financial events, even those due to terror attacks. Second, although we find the UK and Swiss (non-EMU) options markets essential explaining the transmission of uncertainty shocks across EMU markets (mostly during the financial crisis), this role becomes significantly less important after the Brexit. Third, we find a non-linear relationship between the spillover dynamics and economic policy uncertainty that depends on the global financial cycle and the economic business cycle. Finally, regarding the effects of uncertainty shocks on return’s dynamics, we find a stronger leverage effect in times of uncertainty shock contagion (mostly before 2010) which would lead to different management strategies for different spillover index scenarios. Overall, the results improve our understanding of the inter-market connectedness and stock price dynamics, and our ability to estimate when the transmission of uncertainty shocks is likely. These results may help central banks explain the effectiveness of monetary policy (forward guidance), policymakers design policy to achieve similar effects in different regions and risk managers buy risk (volatility) protection at the lowest cost.

"On Money as a Medium of Exchange in Near-Cashless Credit Economies" Fee Download
NBER Working Paper No. w25803

RICARDO LAGOS, New York University (NYU) - Department of Economics
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SHENGXING ZHANG, London School of Economics (LSE) - Department of Economics
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We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that—in contrast to current conventional wisdom in policy-oriented research in monetary economics—the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable—even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations—even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

"The Fiscal Roots of Inflation" Fee Download
NBER Working Paper No. w25811

JOHN H. COCHRANE, Hoover Institution, National Bureau of Economic Research (NBER), University of Chicago - Booth School of Business
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Unexpected inflation devalues nominal government bonds. This change in value must correspond to a change in expected future surpluses, a change in their discount rates, or a contemporaneous change in nominal bond returns. I develop a linearized version of the government debt valuation equation, and I measure each component via a vector autoregression. I find that discount rate variation is important. Unexpected inflation corresponds entirely to a rise in discount rates, with no change in the sum of expected future surpluses. A recession shock, which lowers inflation and output, signals persistent deficits, but also lower interest rates, which raise the value of debt and account fully for the lower inflation. A monetary policy shock, defined here as a rise in interest rates with no change in expected future surpluses, raises inflation immediately and persistently. Nominal rates rise more than real rates, raising the discount factor and thus accounting for the inflation. In these calculations, the present value of surpluses changes by more than current inflation. Persistently higher inflation and nominal interest rates cause current long term bonds to fall in value, soaking up variation in the present value of surpluses. By this mechanism monetary policy spreads fiscal shocks to persistent inflation rather than price level jumps. I also decompose the value of government debt. Half of the value of debt corresponds to forecasts of future primary surpluses, and half to discount rates, driven by variation in bond expected returns.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

"Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System: How Much is Too Much?" Fee Download
Canadian Journal of Economics/Revue canadienne d'économique, Vol. 52, Issue 2, pp. 735-762, 2019

NELLIE (YINAN) ZHANG, Government of Canada - Bank of Canada

English Abstract: This paper applies a static model of an interest rate corridor to the Canadian data and estimates the aggregate demand for central bank settlement balances in the Large Value Transfer System (LVTS). The analysis takes into account the downward divergence of the overnight interest rate from the target rate, which has been persistent since 2005. The results suggest that a target of $3,000,000,000 for LVTS settlement balances does not seem excessive during the time period when Canadian monetary policy was operating at the effective lower bound (ELB). In addition, the estimation shows that the point elasticity of overnight interest rate is around 0.17 in the ELB framework.

French Abstract: Évaluation de la demande de soldes de règlement au sein du système de transfert de paiements de grande valeur canadien: est?elle excessive ? L’auteure applique aux données canadiennes un modèle statique formalisant un corridor de taux d’intérêt en vue d’estimer la demande totale de soldes de. L’analyse tient compte de la divergence à la baisse du taux du financement à un jour qu’on observe depuis 2005 par rapport au taux visé. D’après les résultats obtenus, un niveau cible de 3 milliards de dollars pour les soldes de règlement durant la période où le taux directeur au Canada se situait à sa valeur plancher ne paraît pas excessif. L’estimation montre en outre que l’élasticité du taux à un jour s’établit à environ 0,17 quand le taux directeur se trouve à sa valeur plancher.

"The Great Recession, Austerity and Inequality: Lessons from Ireland" Fee Download
Review of Income and Wealth, Vol. 65, Issue 2, pp. 312-336, 2019

M. SAVAGE, Economic and Social Research Institute (ESRI)
T. CALLAN, Economic and Social Research Institute (ESRI)
B. NOLAN, University of Oxford - Institute for New Economic Thinking at the Oxford Martin School
B. COLGAN, VU Amsterdam

The advent of the Great Recession and the widespread adoption of fiscal austerity policies have heightened concern about inequality and its effects. We examine how the distribution of income in Ireland—a country which experienced one of the most severe economic contractions—has evolved over the years 2008 to 2013. Standard cross‐sectional analysis of the income distribution shows broad stability in the Gini coefficient and in decile shares, with one main exception: the share of the bottom decile fell sharply, with the largest fall in average incomes being for that group. Longitudinal analysis shows that the falls in the average income for the bottom decile were not due to decreasing income for those remaining in the bottom decile, but to falls in income from those initially located in higher deciles. The extent of redistribution through taxes and transfers increased strongly, as measured by the Reynolds‐Smolensky index, which rose from 0.20 before the onset of the crisis to 0.27 in 2013. Analysis indicates that about three‐quarters of this increased redistribution is due to automatic stabilisers and one‐quarter to discretionary policy changes.

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MACROECONOMICS EJOURNALS

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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
Rosen Family Chair in International Finance, 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
Senior Fellow and Professor, Hoover Institution and Department of Economics, Stanford University, 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, Research Associate, 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 (deceased), National Bureau of Economic Research (NBER) (deceased)

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)