Macroeconomics has been under scrutiny as a field since the financial crisis, which brought an abrupt end to the optimism of the Great Moderation. There is widespread acknowledgement that the ...prevailing dynamic stochastic general equilibrium (DSGE) models performed poorly, but little agreement on what alternative future paradigm should be pursued. This article is the elaboration of four blog posts that together present a clear message: current DSGE models are flawed, but they contain the right foundations and must be improved rather than discarded. Further, we need different types of macroeconomic models for different purposes. Specifically, there should be five kinds of general equilibrium models: a common core, plus foundational theory, policy, toy, and forecasting models. The different classes of models have a lot to learn from each other, but the goal of full integration has proven counterproductive. No model can be all things to all people.
Abstract
Macroeconomic policy models should track the different channels of monetary transmission, providing a framework for Monetary Policy Committees. They should also be useful for assessing risks ...to financial stability, including for designing macroprudential stress tests and instrument settings in the new macroprudential toolkits. Current policy models, including the ‘semi-structural’ non-DSGE econometric models such as FRB-US, are seriously deficient in these respects, failing to capture the credit channel and the role of real estate in the financial accelerator that operated in the global financial crisis, and in key transmission channels in the recovery. Furthermore, developments in economic theory, greatly encouraged by new evidence, have rendered redundant the previously accepted micro-foundations for household behaviour in these policy models.
A multi-purpose policy model needs to include a household-housing sub-system. This should contain a consumption function broadly consistent with the micro-evidence with equations for permanent income, for the balance sheet drivers, and for residential investment. To capture the credit channel, this block of the model needs to embed common credit conditions in the equations. Sub-system estimation is required to impose the cross-equation restrictions implied by these common factors.
MEASURING ECONOMIC POLICY UNCERTAINTY BAKER, SCOTT R.; BLOOM, NICHOLAS; DAVIS, STEVEN J.
The Quarterly journal of economics,
11/2016, Letnik:
131, Številka:
4
Journal Article
Recenzirano
Odprti dostop
We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence—including human readings of 12,000 newspaper articles—indicate that our ...index proxies for movements in policy-related economic uncertainty. Our U.S. index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health care, finance, and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Extending our U.S. index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upward since the 1960s.
We construct a new monthly index of Economic Policy Uncertainty for China in 2000–2018 based on Chinese newspapers. Different from the existing index, ours uses information from multiple local ...newspapers, and foreshadows declines in equity price, employment and output. Media censorship does not seem to have qualitative impact to our index. Moreover, we develop a daily uncertainty index and several policy-specific uncertainty indices for public use.
•A new monthly index of Economic Policy Uncertainty for China in 2000–2018 is constructed.•Our index uses information from multiple local newspapers.•Our index foreshadows declines in equity price, employment and output.•Media censorship does not seem to have qualitative impact to our index.•Moreover, we develop a daily index and several policy-specific indices.
•This paper monitors the distribution of China’s GDP growth.•The dynamics of China’s GDP-at-risk exhibit event-driven characteristics.•Downside risks are traced back to the decreases in Chinese ...housing price.•Interest rate-based monetary policy has a more sustainable economic effect.
Timely monitoring GDP-at-risk and tracing economic downside risk sources can help establish effective risk warning and prevention systems. This study constructs a probability distribution for China’s economic growth with skewness determined by a multidimensional predictor information set of macro fundamentals. Such a treatment allows us to identify changing drivers of economic downside risks during monitoring GDP-at-risk’s dynamic evolutionary path. We also employ a time-varying parameter vector autoregression model with random volatility to explore the heterogeneous impacts of different macroeconomic policy instruments on economic slowdowns. Our results provide empirical support for macroeconomic management and policy formulation in emerging markets. We reach three conclusions. First, the dynamics of GDP-at-risk exhibit significant event-driven characteristics, and economic downside risk increases significantly under the influence of extreme events. Moreover, the probability distribution of economic growth is asymmetric--as the downside risk of the economy increases, its upside potential increases disproportionately. Second, the time-varying risk trace of GDP-at-risk shows that the contribution of financial conditions and local government debt to economic downside risk declines. The importance of the risk-driving role of housing price growth gradually increases, suggesting that China’s property prices can provide more valuable early warning information about future growth risk, allowing time for precise preventive measures. Nevertheless, interest rates and inflation as risk divers have consistently minimal impacts. Third, the heterogeneity impulse response function of GDP-at-risk suggests that quantity-based monetary policy and fiscal policy can manage economic downside risks in the short run. In contrast, price-based monetary policy can curb economic overheating and reduce downside risks in the medium to long term. Therefore, the effect of price-based monetary policy is more sustainable in China.
The future of macroeconomics Hendry, David F.; Muellbauer, John N. J.
Oxford review of economic policy,
01/2018, Letnik:
34, Številka:
1/2
Journal Article
Recenzirano
Odprti dostop
The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic ...micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve’s FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a ‘suite of models’. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.
•We investigate factors that have driven Ethiopia’s recent growth acceleration.•Public infrastructure investment was a key driver of growth.•Infrastructure was to a relevant degree financed with ...heterodox macro-policies.•Negative growth effects of these heterodox macro policies were comparably modest.•No other country recently achieved as high growth with a similar policy mix.
Ethiopia has experienced an impressive growth acceleration over the past decade. This was achieved on the back of an economic strategy emphasizing public infrastructure investment supported by heterodox macro-financial policies. This paper identifies the drivers of Ethiopia’s recent growth episode and examines the extent to which they were typical or unique. It combines country-specific information with the results of a cross-country panel regression model. We find that Ethiopia’s growth is explained well by factors correlating with growth in a broad range of countries in recent decades, including public infrastructure investment, restrained government consumption, and a conducive external environment. On the other hand, we argue that the policy mix that supported very high levels of public investment in Ethiopia was, to some extent, unique. Interestingly, macroeconomic imbalances due to this heterodox policy mix only moderately held back growth which helps explain why Ethiopia was able to grow so fast in spite of their presence: their negative effects were quantitatively much less important than the positive growth drivers they helped to achieve. The results suggest that “getting infrastructure right” may outweigh moderate shortcoming in the macro framework at early stages of development. We further relate this country-specific finding to the recent growth literature.
This paper investigates the impact of economic policy uncertainty on financial stability. Using data for 23 countries over the period of 1996 to 2016, we show that the impact is negative and ...statistically significant. Economically, a unit standard deviation increase in economic policy uncertainty decreases financial stability by between 2.66% and 7.26% of its sample mean. The negative impact of economic policy uncertainty on financial stability is stronger for countries with higher competition, lower regulatory capital, and smaller financial systems. We show that our finding is robust using bank-level data and different constructions of global panel portfolios, and controlling for Z-score skewness, the Global Financial Crisis, and for endogeneity.
•This paper investigates the effect of economic policy uncertainty (EPU) on financial stability in 23 countries.•We find that EPU has a negative and statistically significant impact on financial stability.•The effect depends on the financial system characteristics.•The findings are consistent in a range of robustness tests.
The Safety Trap CABALLERO, RICARDO J.; FARHI, EMMANUEL
Review of economic studies/The review of economic studies,
01/2018, Letnik:
85, Številka:
1 (302)
Journal Article
Recenzirano
Odprti dostop
In this article, we provide a model of the macroeconomic implications of safe asset shortages. In particular, we discuss the emergence of a deflationary safety trap equilibrium with endogenous risk ...premia. It is an acute form of a liquidity trap, in which the shortage of a specific form of assets, safe assets, as opposed to a general shortage of assets, is the fundamental driving force. At the Zero Lower Bound, our model has a Keynesian cross representation, in which net safe asset supply plays the role of an aggregate demand shifter. Essentially, safety traps correspond to liquidity traps in which the emergence of an endogenous risk premium significantly alters the connection between macroeconomic policy and economic activity. “Helicopter drops” of money, safe public debt issuances, swaps of private risky assets for safe public debt, or increases in the inflation target, stimulate aggregate demand and output, while forward guidance is less effective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets.
We examine the impact of economic policy uncertainty (EPU) on bank liquidity hoarding. We create a comprehensive measure of bank liquidity hoarding that takes into account asset-, liability-, and ...off-balance sheet activities. Using over one million bank-quarter observations, we find that in response to EPU, banks hoard liquidity overall and through all three components. This behavior is more pronounced for banks with less liquidity, more peer-bank spillover effects, and more EPU exposure. Additional analyses of interest rate spreads on several bank products suggest that our findings reflect at least in part bank choices, rather than just the reactions of customers.
PDF
