This paper proposes an extension to Global Vector Autoregressive (GVAR) models to capture time-varying interdependence among financial variables. Government bond spreads in the euro area feature a ...time-varying pattern of co-movement that poses a serious challenge for econometric modelling and forecasting. This pattern of the data is not captured by the standard specification that model spreads as persistent processes reverting to a time-varying mean determined by two factors: a local factor, driven by fiscal fundamentals and growth, and a global world factor, driven by the market’s appetite for risk. This paper argues that a third factor, expectations of exchange rate devaluation, gained traction during the crises. This factor is well captured via a GVAR that models the interdependence among spreads by making each country’s spread function of global European spreads. Global spreads capture the exposure of each country’s spread to other spreads in the euro area in terms of the time-varying ‘distance’ between their fiscal fundamentals. This new specification dominates the standard one in modelling the time-varying pattern of co-movements among spreads and the response of euro area spreads to the Greek debt crisis.
We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary ...policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.
Austerity Alesina, Alberto
2019, 20190219, 2019-02-19
eBook
A timely and incisive look at austerity measures that succeed-and those that don't
Fiscal austerity is hugely controversial. Opponents argue that it can trigger downward growth spirals and become ...self-defeating. Supporters argue that budget deficits have to be tackled aggressively at all times and at all costs. In this masterful book, three of today's leading policy experts cut through the political noise to demonstrate that there is not one type of austerity but many.
Looking at thousands of fiscal measures adopted by sixteen advanced economies since the late 1970s,Austerityassesses the relative effectiveness of tax increases and spending cuts at reducing debt. It shows that spending cuts have much smaller costs in terms of output losses than tax increases. Spending cuts can sometimes be associated with output gains in the case of expansionary austerity and are much more successful than tax increases at reducing the growth of debt. The authors also show that austerity is not necessarily the kiss of death for political careers as is often believed, and provide new insights into the recent cases of European austerity after the financial crisis.
Bringing needed clarity to one of today's most challenging subjects,Austeritycharts a sensible approach based on data analysis rather than ideology.
•This paper illustrates a low-cost, Internet-based, financial and demographic literacy program, Finlife•Finlife delivered a substantially and statistically significant increase in financial and ...demographic literacy•Finlife changed behaviors towards greater attention to financial markets•Finlife caused different choices in financial planning and in investing for retirement.
This study experimentally tests a low-cost, Internet-based,online literacy intervention program implemented with the largest employer-based pension fund in Italy. This program, called Financial Education and Planning for a Long Life (Finlife) included: 1) an online instructional video on financial, and demographic (survival) literacy; 2) an experimental design to evaluate the impact of the online videoprogram on financial and demographic literacy, as well as and on short-term behavioral changes in behavior; and 3) a follow-up to assess the impact of the videoprogram on subsequent choices of available investment lines in the Italian pension fund. Finlife was designed as a low-cost and, scalable approach aimed at increasing financial and demographic survival literacy, which is consistent with a ‘nudge’ philosophy. Based on the findings, Finlife significantly increased the financial and demographic survival literacy of the participants, and pushed them towards seeking more information and becoming more active in financial decisions.
The output effect of fiscal consolidation plans Alesina, Alberto; Favero, Carlo; Giavazzi, Francesco
Journal of international economics,
07/2015, Letnik:
96, Številka:
Supp.1
Journal Article
Recenzirano
Odprti dostop
We show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi-year fiscal plan rather than of individual fiscal shocks. Simulation of fiscal plans ...adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist of permanent rather than stop-and-go changes in taxes and spending. The difference between tax-based and spending-based adjustments appears not to be explained by accompanying policies, including monetary policy. It is mainly due to the different responses of business confidence and private investment.
Two broad classes of consumption dynamics-long-run risks and rare disasters-have proven successful in explaining the equity premium puzzle when used in conjunction with recursive preferences. We show ...that bounds a-là Gallant, Hansen, and Tauchen that restrict the volatility of the stochastic discount factor by conditioning on a set of return predictors constitute a useful tool to discriminate between these alternative dynamics. In particular, we document that models that rely on rare disasters meet comfortably the bounds independently of the forecasting horizon and the asset returns used to construct the bounds. However, the specific nature of disasters is a relevant characteristic at the 1-year horizon: disasters that unfold over multiple years are more successful in meeting the predictors-based bounds than one-period disasters. Instead, at the 5-year horizon, the sole presence of disasters-even if one-period and permanent-is sufficient for the model to satisfy the bounds. Finally, the bounds point to multiple volatility components in consumption as a promising dimension for long-run risk models.
The literature on fiscal multipliers is far from having reached an agreed upon conclusion. One result, however, seems very robust: in OECD economies, fiscal consolidations based upon expenditure cuts ...are much less costly than those performed on the tax side. The purpose of this paper is twofold. First, we review recent evidence which considers multi-year fiscal plans. Analyzing multi-year plans is a better way of studying the effects of fiscal policy because governments typically adopt multi-year budget laws. Second, we illustrate alternative theoretical explanations for our findings and we discuss which ones seem more appropriate in different cases.
Population-wide increase in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate that risk. This paper extends the standard ...Campbell–Viceira (2005) strategic asset allocation model by including a longevity-linked investment possibility. Model estimation, based on prices for standardized annuities publicly offered by U.S. insurance companies, shows that aggregate shocks to survival probabilities are predictors for long-term returns of the longevity-linked securities, and reveals an unexpected predictability pattern. Valuation of longevity risk premium confirms that longevity-linked securities offer inexpensive funding opportunities to asset managers.
Italy is characterized by a large sectoral imbalance (government debt) that has generated a pervasive country-risk premium and affected financial markets and the real economy. In this regard, ITFIN ...is a quarterly econometric model for the Italian economy that adopts a stock-flow consistent framework to describe sectoral and macroeconomic dynamics. Developed at Italy’s Department of the Treasury, this model focuses on determining the sovereign risk premium in the government debt market, its impact on the financial and banking system, and its transmission to the real economy. The financial position of each institutional sector is derived through a stock-flow consistent approach. Additionally, prices and returns for financial instruments are derived by modeling their supply and demand, along with a characterization of how financial stocks impinge on agents’ decisions and the patterns of real variables. Overall, our study illustrates this model and describes its properties by simulating the economy’s response under two counterfactual scenarios on monetary policy and different shocks to fiscal policy.
•Italy’s sectoral imbalance significantly affects financial markets and the economy.•ITFIN is a forecasting model that considers sectoral balances and imbalances.•The model determines the sovereign risk premium in government debt and its impact.•Positions of institutional sectors are derived from a stock-flow consistent model.•The model’s properties are described through monetary and fiscal policy scenarios.
This paper puts forward a proposal to complete the ECB Transmission Protection Instrument (TPI) with the aim of making it more effective in anchoring the yields of European sovereign debts to Member ...States’ fundamentals. We use a model in which yields fluctuate within bands, which we specify following two alternative approaches: stochastic and deterministic. The resulting fluctuation's interval represents the range of yields that can be seen as justified by Member States’ fundamentals; yields outside the band would instead trigger the ECB intervention as foreseen by the TPI. The proposal minimizes the risk of moral hazard, as the fluctuation bands vary as each country's creditworthiness changes. Moreover, the proposal is directly implementable with existing Treaties.
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