ワーキングペーパー 2014年度 一覧に戻る

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  • 「デフレ期における価格の硬直化 原因と含意」

    Abstract

    我が国では 1995 年から 2013 年春まで消費者物価(CPI)が趨勢的に低下するデフレが続いた。このデフレは,下落率が毎年 1%程度であり,物価下落の緩やかさに特徴がある。また,失業率が上昇したにもかかわらず物価の反応は僅かで,フィリップス曲線の平坦化が生じた。デフレがなぜ緩やかだったのか,フィリップス曲線がなぜ平坦化したのかを考察するために,本稿ではデフレ期における価格硬直性の変化に注目する。本稿の主なファインディングは以下のとおりである。第 1 に,CPI を構成する 588 の品目のそれぞれについて前年比変化率を計算すると,ゼロ近傍の品目が最も多く,CPI ウエイトで約 50%を占める。この意味で価格硬直性が高い。この状況は1990 年代後半のデフレ期に始まり,CPI 前年比がプラスに転じた 2013 年春以降も続いている。米国などでは上昇率 2%近傍の品目が最も多く,我が国と異なっている。これらの国では各企業が毎年 2%程度の価格引き上げを行うことがデフォルトなのに対して,我が国ではデフレの影響を引きずって価格据え置きがデフォルトになっていると解釈できる。第 2 に,1970 年以降の月次データを使って,前年比がゼロ近傍の品目の割合と CPI 前年比の関係をみると,CPI 前年比が高ければ高いほど(CPI 前年比がゼロからプラス方向に離れれば離れるほど)ゼロ近傍の品目の割合が線形に減少するという関係がある。インフレ率が高まると価格を据え置きに伴う機会費用が大きくなるためと解釈でき,メニューコスト仮説と整合的である。この結果を踏まえると,1990 年代後半以降の価格硬直化は,CPI 前年比の低下に伴って内生的に生じたものであり,今後 CPI 前年比が高まれば徐々に伸縮性を取り戻すと考えられる。第 3 に,シミュレーション分析によれば,長期にわたってデフレ圧力が加わると,実際の価格が本来あるべき価格水準を上回る企業が,通常よりも多く存在する状況が生まれる。つまり,「価格引き下げ予備軍」(できることなら価格を下げたいと考えている企業)が多い。一方,実際の価格が本来あるべき価格水準を下回る「価格引き上げ予備軍」は少ない。この状況では金融緩和が物価に及ぼす影響は限定的である。我が国では,長期にわたるデフレの負の遺産として,「価格引き下げ予備軍」が今なお多く存在しており,これを一掃するのは容易でない。

    Introduction

    我が国では 1990 年代半ば以降,消費者物価(CPI)が下落する傾向にあり,デフレーションが続いてきた。デフレからの脱却を目指し,政府と日本銀行はいくつかの施策を実施してきた。1999 年から 2000 年に日銀の政策金利であるコールレートをゼロに下げる「ゼロ金利政策」を採用したのに続き,2001 年から 2006 年には「量的緩和政策」を行った。最近では,2013 年1 月に物価上昇率の目標値として CPI 上昇率2%を掲げる物価目標政策を開始した。さらに2013 年 4 月には 2%の物価目標を 2 年以内に達成するとアナウンスし,その実現に向けてベースマネーの量を 2 年間で 2 倍にする「量的・質的緩和政策(Quantitative Qualitative Easing,QQE)」を開始した。

  • Optimal Taxation and Debt with Uninsurable Risks to Human Capital Accumulation

    Abstract

    We consider an economy where individuals face uninsurable risks to their human capital accumulation, and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt. We show that in the presence of such risks it is beneficial to tax both labor and capital and to issue public debt. We also assess the quantitative importance of these findings, and show that the benefits of government debt and capital taxes both increase with the magnitude of idiosyncratic risks and the degree of relative risk aversion.

    Introduction

    Human capital is an important component of wealth both at the individual and aggregate level, and its role has been investigated in various fields in economics. In public finance, Jones, Manuelli and Rossi (1997) show that the zero-capital-tax result of Chamley (1986) and Judd (1985)1 can be strengthened if human capital accumulation is explicitly taken into account. Specifically, they demonstrate that, in a deterministic economy with human capital accumulation, in the long run not only capital but also labor income taxes should be zero, hence the government must accumulate wealth - that is, public debt be negative - to finance its expenditure.

  • Time Varying Pass-Through: Will the Yen Depreciation Help Japan Hit the Inflation Target?

    Abstract

    There is a growing recognition that pushing up the public’s inflation expectation is a key to a successful escape from a chronic deflation. The question is how this can be achieved when the economy is stuck in a liquidity trap. This paper argues that, for Japan, the currency depreciation since the late 2012 could turn out to be useful for ending the country’s long battle with falling prices. Prior studies have suggested that household expectations are greatly influenced by prices of items that they purchase frequently. This paper demonstrates that the extent of exchange rate pass-through to those prices, once near-extinct, has come back strong in recent years. Evidence based on VARs as well as TVP-VARs indicates that a 25% depreciation of the yen would produce a 2% increase in the prices of goods that households purchase regularly.

    Introduction

    This paper re-examines the issue of exchange rate pass-through to the Japanese CPI. Special attention is paid to prices of items that households purchase more frequently. This focus is partly motivated by recent statements regarding the transmission mechanism of monetary policy from the Bank of Japan officials. They stress importance of shifting the public’s inflation expectation upwards. A question that immediately comes to mind is how to achieve such a goal in an environment of zero interest rate, in which the monetary authority lacks a clear way to directly influence the course of the private sector.

  • A Reformulation of Normative Economics for Models with Endogenous Preferences

    Abstract

    This paper proposes a framework to balance considerations of welfarism and virtue ethics in the normative analysis of economic models with endogenous preferences. We introduce the moral evaluation function (MEF), which ranks alternatives based purely on virtue ethics, and define the social objective function (SOF), which combines the Social Welfare Function (SWF) and the MEF. In a model of intergenerational altruism with endogenous time preference, using numerical simulations we show that maximizing the SWF may not yield a socially desirable state if the society values virtue. This problem can be resolved by using the SOF to evaluate alternative social states.

    Introduction

    Many theoretical and empirical studies have emphasized and identified various channels through which preferences might be endogenously determined in the economy. In the models studied in the literature of intergenerational cultural preference transmission and formation (see Bisin and Verdier (2011)for a survey), children’s preferences are affected by parents’ decisions. Habit formation models have been used in macroeconomics (see, e.g., Lawrence, Eichenbaum and Evans (2005)), and finance (see, e.g., Constantinides (1990)). Addiction models have been used in microeconomis (e.g., Becker and Murphy (1988)). In the literature of behavioral economics, reference points are often endogenously determined (see, e.g., K˝oszegi and Rabin (2006)).

  • Estimating Quality Adjusted Commercial Property Price Indexes Using Japanese REIT Data

    Abstract

    We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e., the discount rate) and the numerator (i.e., cash flows from properties) are estimated differs from the traditional method. We run a hedonic regression to estimate the quality adjusted discount rate based on the share prices of REITs, which can be regarded as the stock market’s valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated only with new rental contracts rather than those associated with all existing contracts. Using a dataset with prices and cash flows for about 400 commercial properties included in Japanese REITs for the period 2001 to 2013, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the second quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.

    Introduction

    Looking back at the history of economic crises, there are a considerable number of cases where a crisis was triggered by the collapse of a real estate price bubble. For example, it is widely accepted that the collapse of Japan’s land and stock price bubble in the early 1990s has played an important role in the subsequent economic stagnation, and in particular the banking crisis that started in the latter half of the 1990s. Similarly, the Nordic banking crisis in the early 1990s also occurred in tandem with a property bubble collapse, while the global financial crisis that began in the United States in 2008 and the European debt crisis were also triggered by the collapse of bubbles in the property and financial markets.

  • Relative Prices and Inflation Stabilisations

    Abstract

    When price adjustment is sluggish, inflation is costly in terms of welfare because it distorts various kinds of relative prices. Stabilising aggregate price inflation does not necessarily minimise these costs, but stabilising a well-designed core inflation minimises the cost of relative price fluctuations and thus the cost of inflation.

    Introduction

    In macroeconomic theories, the aggregate price level, often denoted as P, is defined as the monetary value of the minimum cost of attaining a reference utility level. Measures of the price level are called a “cost-of-living” index. Measuring the price level has been an important topic in macroeconomics, because any fluctuation in the price level —inflation— is regarded as affecting the well-being of households.

  • Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

    Abstract

    When individuals’ labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks, the degree of heterogeneity among consumers’ income as well as on the way in which the tax revenue is used to provide lump sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However in other cases a negative tax on capital is welfare improving. (JEL codes: D52, H21. Keywords: optimal linear taxes, incomplete markets, constrained efficiency)

    Introduction

    The main objective of this paper is to investigate the welfare effects of investment and labor income taxes in a two period production economy with uninsurable background risk. More precisely, we examine whether the introduction of linear, distortionary taxes or subsidies on labor income and/or on the returns from savings are welfare improving and what is then the optimal sign of such taxes. This amounts to studying the Ramsey problem in a general equilibrium set-up. We depart however from most of the literature on the subject for the fact that we consider an environment with no public expenditure, where there is no need to raise tax revenue. Nonetheless, optimal taxes are typically nonzero; even distortionary taxes can improve the allocation of risk in the face of incomplete markets. Then the question is which production factor should be taxed: we want to identify the economic properties which determine the signs of the optimal taxes on production factors.

  • Rational Bubble on Interest-Bearing Assets

    Abstract

    This paper compares fiat money and a Lucas’ tree in an overlapping generations model. A Lucas’ tree with a positive dividend has a unique competitive equilibrium price. Moreover, the price converges to the monetary equilibrium value of fiat money as the dividend goes to zero in the limit. Thus, the value of liquidity represented by a rational bubble is part of the fundamental price of a standard interestbearing asset. A Lucas’ tree has multiple equilibrium prices if the dividend vanishes permanently with some probability. This case may be applicable to public debt, but not to stock or urban real estate.

    Introduction

    Fiat money and a rational bubble have the same property as liquidity. As shown by Samuelson (1958) and Tirole (1985), they attain a positive market value if they are expected to be exchangeable for goods in the future. It is also common that they become worthless if they are expected to be worthless in the future, given no intrinsic use of them. This property of selffulfilling multiple equilibria has been used to explain a large boom-bust cycle in an asset price, because a stochastic transition between the two equilibria can generate a boom-bust cycle by speculation without any change in asset fundamentals.

  • The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information

    Abstract

    This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank’s actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant “constrained discretion” to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.

    Introduction

    How much flexibility should society allow a central bank in its conduct of monetary policy? At the center of the case for flexibility is the argument that central bankers have private information (Canzoneri, 1985), perhaps about the economy’s state or structure, or perhaps about the distributional costs of inflation arising through heterogeneous preferences (Sleet, 2004). If central banks have flexibility over policy decisions, then this gives them the ability to use for the public’s benefit any private information that they have. However, if central banks face a time-inconsistency problem (Kydland and Prescott, 1977), then it may be beneficial to limit their flexibility. Institutionally, many countries have balanced these competing concerns by delegating monetary policy to an independent central bank that is required to keep inflation outcomes low and stable, often within a stipulated range, but that is otherwise given the freedom to conduct policy without interference. Inflation targeting is often characterized as “constrained discretion” (Bernanke and Mishkin, 1997) precisely because it endeavors to combine flexibility with rule-like behavior.

  • The Effects of Financial and Real Shocks, Structural Vulnerability and Monetary Policy on Exchange Rates from the Perspective of Currency Crises Models

    Abstract

    Is there any factor that is not analyzed in the literature but is important for preventing currency crises? What kind of shock is important as a trigger of a currency crisis? Given the same shock, how does the impact of a currency crisis differ across countries depending on the degree of each country’s structural vulnerability? To answer these questions, this paper analyzes currency crises both theoretically and empirically. In the theoretical part, I argue that exports are an important factor to prevent currency crises that has not been frequently analyzed in the existing theoretical literature. Using the third generation model of currency crises, I derive a simple and intuitive formula that captures an economy’s structural vulnerability characterized by the elasticity of exports and repayments for foreign currency denominated debt. I graphically show that the possibility of currency crisis equilibrium depends on this structural vulnerability. In the empirical part, I use unbalanced panel data comprising 51 emerging countries from 1980 to 2011. The results obtained here are consistent with the prediction of the theoretical models. First, I found that monetary tightening by the central banks can have a significant effect on exchange rates. Second, I found that both productivity shocks in the real sector and shocks to a country’s risk premium in the financial markets affect exchange rate dynamics, while productivity shocks appeared more quantitatively important during the Asian currency crisis. Finally, the structural vulnerability of the country plays a statistically significant role for propagating the effects of the shock.

    Introduction

    The literature on currency crises has analyzed causes and mechanisms of how the crises occur and what happens when countries experience the crises. Little theoretical literature has focused on factors that prevent currency crises other than policy responses. Is there any factor that is not analyzed in the literature but is important for preventing currency crises?

  • A New Look at Uncertainty Shocks: Imperfect Information and Misallocation

    Abstract

    Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct new empirical measures of firm-level uncertainty using data from the I/B/E/S and Compustat. These new measures reveal persistent differences in the degree of uncertainty facing individual firms not reflected by existing measures. Consistent with existing measures, I find that the average level of uncertainty across firms is countercyclical, and that it rose sharply at the start of the Great Recession. I next develop a heterogeneous firm model with Bayesian learning and uncertainty shocks to study the aggregate implications of my new empirical findings. My model establishes a close link between the rise in firms’ uncertainty at the start of a recession and the slow pace of subsequent recovery. These results are obtained in an environment that embeds Jovanovic’s (1982) model of learning in a setting where each firm gradually learns about its own productivity, and each occasionally experiences a shock forcing it to start learning afresh. Firms differ in their information; more informed firms have lower posterior variances in beliefs. An uncertainty shock is a rise in the probability that any given firm will lose its information. When calibrated to reproduce the level and cyclicality of my leading measure of firm-level uncertainty, the model generates a prolonged recession followed by anemic recovery in response to an uncertainty shock. When confronted with a rise in firm-level uncertainty consistent with advent of the Great Recession, it explains 79 percent of the observed decline in GDP and 89 percent of the fall in investment.

    Introduction

    "Subjective uncertainty is about the "unknown unknowns". When, as today, the unknown unknowns dominate, and the economic environment is so complex as to appear nearly incomprehensible, the result is extreme prudence, [. . . ], on the part of investors, consumers and firms." Olivier Blanchard (2012)

  • Post-Crisis Slow Recovery and Monetary Policy

    Abstract

    In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.

    Introduction

    In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed in many economies. GDP has not recovered to its pre-crisis growth trend in the U.S., while it has not returned to even its pre-crisis level in the Euro area. As indicated by recent studies, such as Cerra and Saxena (2008) and Reinhart and Rogoff (2009), financial crises tend to be followed by slow recoveries in which GDP scarcely returns to its pre-crisis growth trend and involves a considerable economic loss. Indeed, since the financial crisis in the 1990s, Japanís GDP has never recovered to its pre-crisis growth trend, and Japanís economy has experienced a massive loss in GDP. The post-crisis slow recoveries therefore cast doubt on the validity of the argument in the literature starting from Lucas (1987) that the welfare costs of business cycles are small enough that they do not justify stabilization policy. Thus our paper addresses the question of whether and to what extent monetary policy can ameliorate social welfare in the face of a severe recession that is caused by a financial factor and is followed by a slow recovery. Particularly, in that situation, should monetary policy focus mainly on inflation stabilization and make no response to output, as advocated in the existing monetary policy literature including Schmitt-GrohÈ and Uribe (2006, 2007a, b)?

  • Multi-Belief Rational-Expectations Equilibria: Indeterminacy, Complexity and Sustained Deflation

    Abstract

    In this paper, we extend the concept of rational-expectations equilibrium, from a traditional single-belief framework to a multi-belief one. In the traditional framework of single belief, agents are supposed to know the equilibrium price “correctly.” We relax this requirement in the framework of multiple beliefs. While agents do not have to know the equilibrium price exactly, they must be correct in that it must be always contained in the support of each probability distribution they think possible. We call this equilibrium concept a multibelief rational-expectations equilibrium. We then show that such an equilibrium exists, that indeterminacy and complexity of equilibria can happen even when the degree of risk aversion is moderate and, in particular, that a decreasing price sequence can be an equilibrium. The last property is highlighted in a linear-utility example where any decreasing price sequence is a multi-belief rational-expectations equilibrium while only possible single-belief rational-expectations equilibrium price sequences are those which are constant over time.

    Introduction

    This paper considers a pure-endowment nonstochastic overlapping-generations economy. In this framework, we extend the concept of rational-expectations equilibrium, or in other words perfect-foresight equilibrium in our setting, in which generations in the model are supposed to know the equilibrium price “correctly.” Thus, there is no surprise in this rational-expectations equilibrium. We relax this requirement to the one that while generations do not know the equilibrium price exactly, they have a set of purely-subjective probability distributions of possible prices. In addition, they must not be surprised by the realization of the equlibrium price. That is, generations’ multi-belief expectations must be “correct” in that the equilibrium price is always contained in the support of each probability distribution they think possible. We call this equilibrium concept multi-belief rational-expectations equilibrium. Furthermore, the realization of the price which clears the market never disappoints generations’ expectations since they assign a positive (but possibly less than unity) probability to the occurrence of that price. Thus, their expectations are “realized.” Importantly, the generations’ beliefs are endogenously determined as a part of multi-belief rational-expectations equilibrium. This is similar to sequential equilibrium in an extensive-form game where the probability distribution at each information set is endogenously determined (although while a unique distribution is determined in a sequential equilibrium, a set of distributions is determined in ours). Obviously, single-belief rational-expectations equilibrium where generations’ expectations are singleton sets is ordinary rational-expectations equilibrium.

  • Reputation and Liquidity Traps

    Abstract

    Can the central bank credibly commit to keeping the nominal interest rate low for an extended period of time in the aftermath of a deep recession? By analyzing credible plans in a sticky-price economy with occasionally binding zero lower bound constraints, I find that the answer is yes if contractionary shocks hit the economy with sufficient frequency. In the best credible plan, if the central bank reneges on the promise of low policy rates, it will lose reputation and the private sector will not believe such promises in future recessions. When the shock hits the economy sufficiently frequently, the incentive to maintain reputation outweighs the short-run incentive to close consumption and inflation gaps, keeping the central bank on the originally announced path of low nominal interest rates.

    Introduction

    Statements about the period during which the short-term nominal interest rate is expected to remain near zero have been an important feature of recent monetary policy in the United States. The FOMC has stated that a highly accomodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. With the current policy rate at its effective lower bound, the expected path of short-term rates is a prominent determinant of the long-term interest rates, which affects the decisions of households and businesses. Thus, the statement expressing the FOMC’s intention to keep the policy rate low for a considerable period has likely done much to keep the long-term nominal rates low and thereby stimulating economic activities.

  • Effects of Commodity Price Shocks on Inflation:A Cross-Country Analysis

    Abstract

    Since 2000s, large fluctuations in non-energy commodity prices have become a concern among policymakers about price stability. Using local projections, this paper investigates the effects of commodity price shocks on inflation. We estimate impulse responses of the consumer price indexes (CPIs) to commodity price shocks from a monthly panel consisting of 120 countries. Our analyses show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects on inflation are fairly robust, suggesting that policymakers may not need to pay special attention to the recent fluctuation in non-energy commodity prices. Employing the smooth transition autoregessive models that use the past inflation rate as the transition variable, we also explore the possibility that the effect of commodity price shocks is influenced by the inflation regimes. In this specification, commodity prices may not have transitory effects when a country is less developed and its currency is pegged to the U.S. dollar. However, the effect remains transitory in developed countries with exchange rate flexibility.

    Introduction

    Fluctuations in the non-energy commodity prices since the early 2000s have renewed policymakers’ attention to their effects on inflation. One of the issues for policymakers is how monetary policy should respond to the commodity price shocks. Among others, Yellen (2011) argues that commodity price shocks have only modest and transitory effects on U.S. inflation and that a recent surge of commodity prices does not “warrant any substantial shift in the stance of monetary policy.” On the other hand, European Central Bank (2008) and International Monetary Fund (2008) express some concerns about the upside risks to price stability due to rising inflation expectations triggered by commodity price shocks.

  • Payment Instruments and Collateral in the Interbank Payment System

    Abstract

    This paper presents a three-period model to analyze the endogenous need for bank reserves in the presence of Treasury securities. The model highlights the fact that the interbank market is an overthe-counter market. It characterizes the large value payment system operated by the central bank as an implicit contract, and shows that the contract requires less liquidity than decentralized settlement of bank transfers. In this contract, bank reserves are the balances of liquid collateral pledged by banks. The optimal contract is equivalent to the floor system. A private clearing house must commit to a time-inconsistent policy to provide the contract.

    Introduction

    Base money consists of cash and bank reserves. Banks do not hold bank reserves merely to satisfy a reserve requirement, but also to settle the transfer of deposit liabilities due to bank transfers. In fact, the average figure for the daily transfer of bank reserves is as large as a sizable fraction of annual GDP in the country. Also, several countries have abandoned a reserve requirement. Banks in these countries still settle bank transfers through a transfer of bank reserves

  • Time-Varying Employment Risks, Consumption Composition, and Fiscal Policy

    Abstract

    This study examines the response of aggregate consumption to active labor market policies that reduce unemployment. We develop a dynamic general equilibrium model with heterogeneous agents and uninsurable unemployment as well as policy regime shocks to quantify the consumption effects of policy. By implementing numerical experiments using the model, we demonstrate a positive effect on aggregate consumption even when the policy serves as a pure transfer from the employed to the unemployed. The positive effect on consumption results from the reduced precautionary savings of the households who indirectly benefit from the policy by a decreased unemployment hazard in future.

    Introduction

    The impact of the recent recession on the labor market was so severe that the unemployment rate in the U.S. is still above normal and the duration of unemployment remains unprecedentedly large. There is a growing interest in labor market policies as effective macroeconomic policy instruments to combat such high unemployment (Nie and Struby (2011)) that has been used conservatively to help the unemployed. Two major questions presented in this literature are as follows: (i) What is the effect of the policy on the labor market performance of program participants? and (ii) What is the general equilibrium consequence of such policy? While there have been extensive microeconometric evaluations and discussions that have led to a consensus on the first question, the second question is unanswered because the indirect effects of the programs on nonparticipants via general equilibrium adjustments are inconclusive. Heckman, Lalonde and Smith (1999) pointed out that the commonly used partial equilibrium approach implicitly assumes that the indirect effects are negligible and can therefore produce misleading estimates when the indirect effects are substantial. Moreover, Calmfors (1994) investigated several indirect effects, and concluded that microeconometric estimates merely provide partial knowledge about the entire policy impact of such programs.

  • Investment Horizon and Repo in the Over-the-Counter Market

    Abstract

    This paper presents a three-period model featuring a short-term investor in the over-the-counter bond market. A short-term investor stores cash because of a need to pay cash at some future date. If a short-term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex-ante, this hold-up problem explains the use of a repo by a short-term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.

    Introduction

    A repo is one of the primary instruments in the money market. In this transaction, a shortterm investor buys long-term bonds with a repurchase agreement in which the seller of the bonds promises to buy back the bonds at a later date. From the seller’s point of view, this transaction is akin to a secured loan with the underlying bonds as collateral. A question remains, however, regarding why a short-term investor needs a repurchase agreement when the investor can simply resell bonds to a third party in a spot market. The answer to this question is not immediately clear, as the bonds traded in the repo market include Treasury securities and agency mortgage-backed securities, for which a secondary market is available.

  • State Dependency in Price and Wage Setting

    Abstract

    The frequency of nominal wage adjustments varies with macroeconomic conditions. Existing macroeconomic analyses exclude such state dependency in wage setting, assuming exogenous timing and constant frequency of wage adjustments under timedependent setting (e.g., Calvo- and Taylor-style setting). To investigate how state dependency in wage setting influences the transmission of monetary shocks, this paper develops a New Keynesian model in which the timing and frequency of wage changes are endogenously determined in the presence of fixed wage-setting costs. I find that state-dependent wage setting reduces the real impacts of monetary shocks compared to time-dependent setting. Further, with state dependency, monetary nonneutralities decrease with the elasticity of demand for differentiated labor, while the opposite holds under time-dependent setting. Next, this paper examines the empirical importance of state dependency in wage setting. To this end, I augment the model with habit formation, capital accumulation, capital adjustment costs, and variable capital utilization. When parameterized to reproduce the fluctuations in wage rigidity observed in the U.S. data, the statedependent wage-setting model shows a response to monetary shocks quite similar to that of the time-dependent counterpart. The result suggests that for the U.S. economy, state dependency in wage setting is largely irrelevant to the monetary transmission.

    Introduction

    The transmission of monetary disturbances has been an important issue in macroeconomics. Recent studies using a dynamic general equilibrium model, such as Huang and Liu (2002) and Christiano, Eichenbaum, and Evans (2005), show that nominal wage stickiness is one of the key factors in accounting for the monetary transmission. However, existing studies establish the importance of sticky wages under Calvo (1983)- and Taylor (1980)-style setting. Such time-dependent setting models are extreme in that because of the exogenous timing and constant frequency of wage setting, wage adjustments occur only through changes in the intensive margin. In contrast, there is evidence that the extensive margin also matters, i.e., evidence for state dependency in wage setting. For example, reviewing empirical studies on micro-level wage adjustments, Taylor (1999) concludes that "the frequency of wage setting increases with the average rate of inflation."Further, according to Daly, Hobijn, and Lucking (2012) and Daly and Hobijn (2014), the fraction of wages not changed for a year rises in recessions in the U.S.1 How does the impact of monetary shocks differ under state- and timedependent wage setting? Is state dependency in wage setting relevant for the U.S. monetary transmission?

  • Buyer-Supplier Networks and Aggregate Volatility

    Abstract

    In this paper, we investigate the structure and evolution of customer-supplier networks in Japan using a unique dataset that contains information on customer and supplier linkages for more than 500,000 incorporated non-financial firms for the five years from 2008 to 2012. We find, first, that the number of customer links is unequal across firms; the customer link distribution has a power-law tail with an exponent of unity (i.e., it follows Zipf’s law). We interpret this as implying that competition among firms to acquire new customers yields winners with a large number of customers, as well as losers with fewer customers. We also show that the shortest path length for any pair of firms is, on average, 4.3 links. Second, we find that link switching is relatively rare. Our estimates indicate that the survival rate per year for customer links is 92 percent and for supplier links 93 percent. Third and finally, we find that firm growth rates tend to be more highly correlated the closer two firms are to each other in a customer-supplier network (i.e., the smaller is the shortest path length for the two firms). This suggests that a non-negligible portion of fluctuations in firm growth stems from the propagation of microeconomic shocks – shocks affecting only a particular firm – through customer-supplier chains.

    Introduction

    Firms in a modern economy tend to be closely interconnected, particularly in the manufacturing sector. Firms typically rely on the delivery of materials or intermediate products from their suppliers to produce their own products, which in turn are delivered to other downstream firms. Two recent episodes vividly illustrate just how closely firms are interconnected. The first is the recent earthquake in Japan. The earthquake and tsunami hit the Tohoku region, the north-eastern part of Japan, on March 11, 2011, resulting in significant human and physical damage to that region. However, the economic damage was not restricted to that region and spread in an unanticipated manner to other parts of Japan through the disruption of supply chains. For example, vehicle production by Japanese automakers, which are located far away from the affected areas, was stopped or slowed down due to a shortage of auto parts supplies from firms located in the affected areas. The shock even spread across borders, leading to a substantial decline in North American vehicle production. The second episode is the recent financial turmoil triggered by the subprime mortgage crisis in the United States. The adverse shock originally stemming from the so-called toxic assets on the balance sheets of U.S. financial institutions led to the failure of these institutions and was transmitted beyond entities that had direct business with the collapsed financial institutions to those that seemed to have no relationship with them, resulting in a storm that affected financial institutions around the world.

  • Payment Instruments and Collateral in the Interbank Payment System

    Abstract

    This paper analyzes the distinction between payment instruments and collateral in the interbank payment system. Given the interbank market is an over-the-counter market, decentralized settlement of bank transfers is inefficient if bank loans are illiquid. In this case, a collateralized interbank settlement contract improves efficiency through a liquidity-saving effect. The large value payment system operated by the central bank can be regarded as an implicit implementation of such a contract. This result explains why banks swap Treasury securities for bank reserves despite that both are liquid assets. This paper also discusses if a private clearing house can implement the contract.

    Introduction

    Base money consists of cash and bank reserves. The latter type of money is used by banks when they settle bank transfers between their depositors. Typically, the daily transfer of bank reserves in a country is as large as a sizable fraction of annual GDP. This large figure implies that banks do not hold bank reserves merely to satisfy a reserve requirement, but also to settle the transfer of deposit liabilities due to daily bank transfers. In fact, several countries have abandoned a reserve requirement. Banks in these countries still settle bank transfers through a transfer of bank reserves.

  • Using Online Prices to Anticipate Official CPI Inflation

    Introduction

    The inflation rate a consumer faces should be, in principle, a relatively simple process to measure. Intuitively, a person has a typical consumption basket, and following the monthly average price of such basket should be the inflation rate the individual experiences. This is, however, hard to implement in practice. Complications abound, such as the fact that consumption baskets are rarely stable through time, consumer’s substitute products when they face changes in relative prices, and many products are often discontinued and replaced with new version or even entirely new product categories. At the aggregate level, the inflation rate is even a harder process to characterize. Baskets and consumption behavior differ markedly across consumers, and traditional data collection methods are expensive and very limited in the quantity of goods and the frequency with which they can be sampled.

  • Optimal Macroprudential Policy

    Abstract

    This paper introduces financial market frictions into a standard New Keynesian model through search and matching in the credit market. Under such financial market frictions, a second-order approximation of social welfare includes a term involving credit, in addition to terms for inflation and consumption. As a consequence, the optimal monetary and macroprudential policies must contribute to both financial and price stability. This result holds for various approximated welfares that can change corresponding to macroprudential policy variables. The key features of optimal policies are as follows. The optimal monetary policy requires keeping the credit market countercyclical against the real economy. Commitment in monetary and macroprudential policy, rather than approximated welfare, justifies history dependence and pre-emptiveness. Appropriate combinations of macroprudential and monetary policy achieve perfect financial and price stability.

    Introduction

    The serious economic disruptions caused by financial crises reveal the critical roles played by financial markets in the U.S. and the Euro area. Acknowledging that the current policy framework cannot fully mitigate nor avoid financial crises, policymakers have begun to shed light on two policy measures. The first is monetary policy, which aims to achieve, in addition to traditional policy goals, stability of the financial system. The second is a new policy tool, macroprudential policy geared toward financial stability.

  • Working Less and Bargain Hunting More: Macro Implications of Sales during Japan’s Lost Decades

    Abstract

    Standard New Keynesian models have often neglected temporary sales. In this paper, we ask whether this treatment is appropriate. In the empirical part of the paper, we provide evidence using Japanese scanner data covering the last two decades that the frequency of sales was closely related with macroeconomic developments. Specifically, we find that the frequency of sales and hours worked move in opposite directions in response to technology shocks, producing a negative correlation between the two. We then construct a dynamic stochastic general equilibrium model that takes households’ decisions regarding their allocation of time for work, leisure, and bargain hunting into account. Using this model, we show that the rise in the frequency of sales, which is observed in the data, can be accounted for by the decline in hours worked during Japan’s lost decades. We also find that the real effect of monetary policy shocks weakens by around 40% due to the presence of temporary sales, but monetary policy still matters.

    Introduction

    Standard New Keynesian models have often neglected temporary sales, although the frequency of sales is far higher than that of regular price changes, and hence it is not necessarily guaranteed that the assumption of sticky prices holds. Ignoring this fact is justified, however, if retailers’ decision to hold sales is independent of macroeconomic developments. If this is the case, temporary sales do not eliminate the real effect of monetary policy. In fact, Guimaraes and Sheedy (2011, hereafter GS) develop a dynamic stochastic general equilibrium (DSGE) model incorporating sales and show that the real effect of monetary policy remains largely unchanged. Empirical studies such as Kehoe and Midrigan (2010), Eichenbaum, Jaimovich, and Rebelo (2011), and Anderson et al. (2012) argue that retailers’ decision to hold a sale is actually orthogonal to changes in macroeconomic developments.

  • Inflation Stabilization and Default Risk in a Currency Union

    Abstract

    By developing a class of dynamic stochastic general equilibrium models with nominal rigidities and assuming a two-country currency union with sovereign risk, we show that there is not necessarily a trade-off between the prevention of default risk and stabilizing inflation. Under optimal monetary and fiscal policy, comprising a de facto inflation stabilization policy, the tax rate as an optimal fiscal policy tool plays an important role in stabilizing inflation, although not completely because of the distorted steady state. Changes in the tax rate to minimize welfare costs via stabilizing inflation then improve the fiscal surplus, and because of this and the incompletely stabilized inflation, the default rate does not increase as much.

    Introduction

    How do we conduct monetary policy in a currency union amid sovereign risk premiums? How do the monetary and fiscal authorities behave in this difficult situation? What clues do we have for removing the trade-off between the prevention of default risk and stabilizing inflation? In this paper, we show that there is not necessarily a trade-off between the prevention of default risk and stabilizing inflation. Policy authorities, namely, the central bank and the government, should without hesitation, conduct optimal monetary and fiscal policies, which is equivalent to stabilizing inflation.

  • Pareto-improving Immigration and Its Effect on Capital Accumulation in the Presence of Social Security

    Abstract

    The effect of accepting more immigrants on welfare in the presence of a pay-as-yougo social security system is analyzed qualitatively and quantitatively. First, it is shown that if initially there exist intergenerational government transfers from the young to the old, the government can lead an economy to the (modified) golden rule level within a finite time in a Pareto-improving way by increasing the percentage of immigrants to natives (PITN). Second, using the computational overlapping generation model, the welfare gain is calculated of increasing the PITN from 15.5 percent to 25.5 percent and years needed to reach the (modified) golden rule level in a Pareto-improving way in a model economy. The simulation shows that the present value of the welfare gain of increasing the PITN comprises 23 percent of the initial GDP. It takes 112 years for the model economy to reach the golden rule level in a Pareto-improving way.

    Introduction

    Transforming a pay-as-you-go(PYGO) social security system into a funded system is not easy. When the PYGO social security system is changed to a funded system, some generations must bear the so called “the double burden”, such that a young generation needs to pay the social security tax twice. Thus, although the transition from a PYGO social security to a funded system is desirable since a PYGO social security system causes under-accumulation of capital, it is difficult to transit in a Pareto-improving way.

  • Investment Horizon and Repo in the Over-the-Counter Market

    Abstract

    This paper presents a three-period model featuring a short-term investor in the over-the-counter bond market. A short-term investor stores cash because of a need to pay cash at some future date. If a short-term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex-ante, this hold-up problem explains the use of a repo by a short-term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.

    Introduction

    Many securities primarily trade in an over-the-counter (OTC) market. A notable example of such securities is bonds. The key feature of an OTC market is that the buyer and the seller in each OTC trade set the terms of trade bilaterally. There has been developed a theoretical literature analyzing the effects of this market structure on spot trading, such as Spulber (1996), Rust and Hall (2003), Duffie, Gˆarleanu, and Pedersen (2005), Miao (2006), Vayanos and Wang (2007), Lagos and Rocheteau (2010), Lagos, Rocheteau and Weill (2011), and Chiu and Koeppl (2011), for example. This literature typically models bilateral transactions using search models and analyzes various aspects of trading and price dynamics, such as liquidity and bid-ask spread, in an OTC spot market.

  • An Estimated DSGE Model with a Deflation Steady State

    Abstract

    Benhabib, Schmitt-GrohÈ, and Uribe (2001) argue for the existence of a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, shocks to householdsí preferences, investment adjustment costs, and external demand do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that the effect of sunspot shocks on Japanís business cycles is marginal and that macroeconomic stability during the period was a result of good luck.

    Introduction

    Dynamic stochastic general equilibrium (DSGE) models have become a popular tool in macroeconomics. In particular, following the development of Bayesian estimation and evaluation techniques, an increased number of researchers have estimated DSGE models for empirical research as well as quantitative policy analysis. These models typically consist of optimizing behavior of households and firms, and a monetary policy rule, along the lines of King (2000) and Woodford (2003). In this class of models, a central bank follows an active monetary policy rule; that is, the nominal interest rate is adjusted more than one for one when inflation deviates from a given target, and the economy fluctuates around the steady state where actual inflation coincides with the targeted inflation. In addition to such a target-inflation steady state, Benhabib, Schmitt-GrohÈ, and Uribe (2001) argue that the combination of an active monetary policy rule and the zero lower bound on the nominal interest rate gives rise to another long-run equilibrium, called a deflation steady state, where the inflation rate is negative and the nominal interest rate is very close to zero.

  • Beauty Contests and Fat Tails in Financial Markets

    Abstract

    Using a simultaneous-move herding model of rational traders who infer other traders’ private information on the value of an asset by observing their aggregate actions, this study seeks to explain the emergence of fat-tailed distributions of transaction volumes and asset returns in financial markets. Without making any parametric assumptions on private information, we analytically show that traders’ aggregate actions follow a power law distribution. We also provide simulation results to show that our model successfully reproduces the empirical distributions of asset returns. We argue that our model is similar to Keynes’s beauty contest in the sense that traders, who are assumed to be homogeneous, have an incentive to mimic the average trader, leading to a situation similar to the indeterminacy of equilibrium. In this situation, a trader’s buying action causes a stochastic chain-reaction, resulting in power laws for financial fluctuations. Keywords: Herd behavior, transaction volume, stock return, fat tail, power law JEL classification code: G14

    Introduction

    Since Mandelbrot [25] and Fama [13], it has been well established that stock returns exhibit fat-tailed and leptokurtic distributions. Jansen and de Vries [19], for example, have shown empirically that the power law exponent for stock returns is in the range of 3 to 5, which guarantees that the variance is finite but the distribution deviates substantially from the normal distribution in terms of the fourth moment. Such an anomaly in the tail shape, as well as kurtosis, has been regarded as one reason for the excess volatility of stock returns.

  • Offshoring, Sourcing Substitution Bias and the Measurement of US Import Prices, GDP and Productivity

    Abstract

    The decade ending in 2007 was a period of rapid sourcing substitution for manufactured goods consumed in the US. Imports were substituted for local sourcing, and patterns of supply for imports changed to give a large role to new producers in emerging economies. The change in the price paid by the buyer of an item who substitutes an import for local sourcing is out of scope for the US import price index, and the price change for an imported item when a new supplier in a different country is substituted for an existing one is also likely to be excluded from the index calculation. Sourcing substitution bias can arise in measures of change in import prices, real GPD and productivity if these excluded price changes are systematically different from other price changes. To determine bounds for how large sourcing substitution bias could be, we analyze productlevel data on changes in import sourcing patterns between 1997 and 2007. Next, we identify products in the US industry accounts that are used for household consumption and that are supplied by imports. We aggregate CPIs, and combinations of MPI and PPIs that cover these products up to the product group level using weights that reflect household consumption patterns. With some adjustments, the gap between the growth rate of the product group index containing MPIs and the growth rate of a corresponding product group index constructed from CPIs can be used to estimate sourcing substitution bias. For the nondurable goods, which were not subject to much sourcing substitution, the gap is near zero. Apparel and textile products, which were subject to considerable offshoring, have an adjusted growth rate gap of 0.6 percent per year. Durable goods have an adjusted gap of 1.2 percent per year, but the upper bound calculation suggests that some of this gap comes from effects other than sourcing substitution. During the period examined, sourcing substitution bias may have accounted for a tenth of the reported multifactor productivity growth of the US private business sector.

    Introduction

    Globalization has brought with it increased international engagement for many of the world’s economies. In the case of the US economy, one of the more striking changes over the past few decades was the growing substitution of imports for products once sourced from local producers. As a share of US domestic absorption of nonpetroleum goods, imports of nonpetroleum goods grew from a starting point of just 8 percent in 1970-71 to 30 percent in 2008 (figure 1). Imports of goods used for personal consumption expenditures (PCE) exhibited similar growth. Between 1969 and 2009, imports at f.o.b. prices grew from 6.1 to 21.4 percent of PCE for durable goods, from 5.1 to 31.9 percent of PCE for clothing and footwear, and from 2.4 percent to 18.6 percent of PCE for nondurables other than clothing, food and energy (McCully, 2011, p. 19).

  • Zipf’s Law, Pareto’s Law, and the Evolution of Top Incomes in the U.S.

    Abstract

    This paper presents a tractable dynamic general equilibrium model of income and firm-size distributions. The size and value of firms result from idiosyncratic, firm-level productivity shocks. CEOs can invest in their own firms’ risky stocks or in risk-free assets, implying that the CEO’s asset and income also depend on firm-level productivity shocks. We analytically show that this model generates the Pareto distribution of top income earners and Zipf’s law of firms in the steady state. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades. In the model, the lower marginal income tax for CEOs strengthens their incentive to increase the share of their firms’ risky stocks in their own asset portfolios. This leads to both higher dispersion and concentration of income in the top income group.

    Introduction

    For the last three decades, there has been a secular trend of concentration of income among the top earners in the U.S. economy. According to Alvaredo et al. (2013), the top 1% income share, the share of total income going to the richest top 1% of the population, declined from around 18% to 8% after the 1930s, but the trend was reversed during the 1970s. Since then, the income share of the top 1% has grown and had reached 18% by 2010, on par with the prewar level.

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