Banking on seniority: the IMF and the sovereign’s creditors
The programs designed by the International Monetary Fund during the Global Financial Crisis have shown more awareness of the importance of domestic demand for the prospects of economic recovery. Yet, the IMF has continued to do little about the late payments made by governments to domestic creditors and suppliers. In contrast, the greater protection historically awarded by the IMF to foreign creditors has endured throughout the recent crisis. The paper suggests that, in order to adequately balance foreign creditor seniority and growth objectives, the IMF may sometimes need to emphasize equitable burden-sharing across categories of creditors rather than privilege the interests of international bond markets.
AUTHORS: Erce, Aitor
Some Like It Hot: Assessing Longer-Term Labor Market Benefits from a High-Pressure Economy
This paper explores evidence for positive hysteresis in the labor market. Using data from the National Longitudinal Surveys of Youth, we find that negative labor market outcomes during high unemployment periods are mitigated by exposure to a high-pressure economy during the preceding expansion. Breaking total exposure into intensity and duration suggests that these two dimensions have differing impacts. However, the benefits of exposure are not enough to overcome the greater negative impact of high unemployment periods on labor market outcomes of disadvantaged groups, making extension of high-pressure economic environments efficacious in reducing labor market gaps.
AUTHORS: Hotchkiss, Julie L.; Moore, Robert E.
Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default
This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 percent decline in equity.
AUTHORS: Gerardi, Kristopher S.; Herkenhoff, Kyle F.; Ohanian, Lee E.; Willen, Paul S.
The inflation expectations of firms: what do they look like, are they accurate, and do they matter?
The purpose of this paper is to answer the three questions in the title. Using a large monthly survey of businesses, we investigate the inflation expectations and uncertainties of firms. We document that, in the aggregate, firm inflation expectations are very similar to the predictions of professional forecasters for national inflation statistics, despite a somewhat greater heterogeneity of expectations that we attribute to the idiosyncratic cost structure firms face. We also show that firm inflation expectations bear little in common with the ?prices in general? expectations reported by households. Next we show that, during our three-year sample, firm inflation expectations appear to be unbiased predictors of their year-ahead observed (perceived) inflation. We also show that firms know what they don?t know?that the accuracy of firm inflation expectations is significantly and negatively related to their uncertainty about future inflation. And lastly, we demonstrate, by way of a cross-sectional Phillips curve, that firm inflation expectations are a useful addition to a policymaker?s information set. We show that firms? inflation perceptions depend (importantly) on their expectations for inflation and their perception of firm-level slack.
AUTHORS: Bryan, Michael F.; Meyer, Brent; Parker, Nicholas B.
The political economy of endogenous taxation and redistribution
This paper examines a simple dynamic model in which agents vote over capital income taxation and redistributive transfers. We show that in equilibrium the typical agent's preferences over the tax rate are single-peaked and derive a closed-form solution for the majority-rule tax rate. We also show that high levels of initial wealth inequality can place the economy on the 'wrong side of the Laffer curve'.
AUTHORS: Dolmas, James; Huffman, Gregory W.
Policy regime change against chronic deflation? Policy option under a long-term liquidity trap
This paper evaluates the role of the first arrow of Abenomics in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, a policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that the reaction of monetary policy to inflation has been declining since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Estimated changes in perceptions are not abrupt enough to satisfy Sargent's (1982) criteria for a regime change. This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?
AUTHORS: Fujiwara, Ippei; Ueda, Kozo; Nakazono, Yoshiyuki
The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model
This paper examines the effectiveness of forward guidance in an estimated New Keynesian model with imperfect central bank credibility. Forward guidance and the credibility of the central bank are uniquely modeled by utilizing a game-theoretic evolutionary framework. We estimate credibility for the U.S. Federal Reserve with Bayesian methods exploiting survey data on interest rate expectations from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimate of Federal Reserve credibility in terms of forward guidance announcements is relatively high, which indicates a degree of forward guidance effectiveness, but still one that is below the fully credible case. (2) If a central bank is perceived as less credible, anticipation effects are attenuated and, accordingly, output and inflation do not respond as favorably to forward guidance announcements. (3) Imperfect credibility and forward guidance are an important aspect to resolve the so-called “forward guidance puzzle,” which the literature shows arises from the unrealistically large responses of macroeconomic variables to forward guidance statements in structural models with perfect credibility. (4) Imperfect central bank credibility can also explain the evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, accounting for imperfect credibility is important to model the formation of expectations in the economy and to understand the transmission mechanism of forward guidance announcements.
AUTHORS: Martinez-Garcia, Enrique; Cole, Stephen J.
Shock Transmission through Cross-Border Bank Lending: Credit and Real Effect
We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks? profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks? supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission.
AUTHORS: Hale, Galina; Kapan, Tumer; Minoiu, Camelia
Global Spillovers of a China Hard Landing
China?s economy has become larger and more interconnected with the rest of the world, thus raising the possibility that acute financial stress in China may lead to global financial instability. This paper analyzes the potential spillovers of such an event to the rest of the world with three methodologies: a VAR, an event study, and a DSGE model. We find the sentiment channel to be the primary spillover channel to the United States, affecting global risk aversion and asset prices such as equity prices and the dollar, in addition to modest real effects through the trade channel. In comparison, the combined financial and real effects to other advanced and emerging market economies, especially net commodity exporters, would be more consequential due to their larger direct exposure to China and more limited scope of monetary policy to respond to shocks.
AUTHORS: Ahmed, Shaghil; Correa, Ricardo; Dias, Daniel A.; Gornemann, Nils; Hoek, Jasper; Jain, Anil K.; Liu, Edith X.; Wong, Anna
Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program
The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an overall increase in the intensity of renegotiations while adversely affecting the effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in the rate of foreclosures and reached just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers?which is also observed before the program?does not reflect differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, it reflects servicer-specific factors that appear to be related to their preexisting organizational capabilities. We exploit regional variation in the share of loans serviced by intermediaries with high pre-program renegotiation activity to assess the economic effects in areas more exposed to the program. Regions where HAMP was used intensively saw a lower rate of house price decline as well as an increase in the pay-down rate on consumer debt. There was no change in non-durable and durable consumption in these regions, suggesting that distressed borrowers who are in the process of debt deleveraging may have a relatively low spending multiplier from moderate debt reduction. We conclude by discussing implications of our findings for debt relief programs in general and for other policy responses to crises that also require intermediaries for implementation.
AUTHORS: Agarwal, Sumit; Amromin, Eugene; Ben-David, Itzhak; Chomsisengphet, Souphala; Piskorski, Tomasz; Seru, Amit