Convergence Analysis of the LDG Method for Singularly Perturbed Reaction-Diffusion Problems

We analyse the local discontinuous Galerkin (LDG) method for two-dimensional singularly perturbed reaction–diffusion problems. A class of layer-adapted meshes, including Shishkin- and Bakhvalov-type meshes, is discussed within a general framework. Local projections and their approximation properties on anisotropic meshes are used to derive error estimates for energy and “balanced” norms. Here, the energy norm is naturally derived from the bilinear form of LDG formulation and the “balanced” norm is artificially introduced to capture the boundary layer contribution. We establish a uniform convergence of order k for the LDG method using the balanced norm with the local weighted L2 projection as well as an optimal convergence of order k+1 for the energy norm using the local Gauss–Radau projections. The numerical method, the layer structure as well as the used adaptive meshes are all discussed in a symmetry way. Numerical experiments are presented.

Government investment fiscal multipliers: evidence from Euro-area countries

This paper aims to estimate the government investment fiscal multipliers in select European countries for the period 1970–2016. To do this, we combine Structural Vector Autoregression (SVAR) modeling with the Local Projections (LP) approach. We estimate models by also controlling for fiscal foresight, excluding the postcrisis period and distinguishing between Northern and Southern countries. Our findings suggest that an increase in government investment generates a “Keynesian effect” by engendering positive and permanent effects on the GDP level, even when government expenditure expectations are considered. Fiscal multipliers are close to 1 on impact and increase in the years after the implementation of a discretionary fiscal policy.

Local L2-bounded commuting projections in FEEC

We construct local projections into canonical finite element spaces that appear in the finite element exterior calculus. These projections are bounded in L2 and commute with the exterior derivative.

Restrictive Policy to Curb Capital Flows Volatility

We examine the role of the restrictive policy, through capital controls, in reducing the capital flows volatility. The study highlights the effects of these controls to dampen international financial shocks. Using quarterly data of 28 emerging economies over the period between 1999 and 2019, three empirical approaches are applied, dynamic panel data, ARDL, and local projections models. Four indexes of capital controls have contributed to the finding that a tighter level of capital controls reduces the sensitivity of capital flows to monetary and exchange rate shocks. These findings on the benefits of capital controls are particularly asymmetric according to the differences between controls on inflows and outflows, and the differences between floating and pegged exchange rate regimes.

On the Non-Inflationary effects of Long-Term Unemployment Reductions

The paper critically examines the New Keynesian explanation of hysteresis based on the role of long-term unemployment. We first examine its analytical foundations, according to which rehiring long-term unemployed individuals would not be possible without accelerating inflation. Then we empirically assess its validity along two lines of inquiry. First, we investigate the reversibility of long-term unemployment. Then we focus on episodes of sustained long-term unemployment reductions to check for inflationary effects. Specifically, in a panel of 25 OECD countries (from 1983 to 2016), we verify by means of local projections whether they are associated with inflationary pressures in a subsequent five-year window. Two main results emerge: i) the evolution of the long-term unemployment rate is almost completely synchronous with the dynamics of the total unemployment rate, both during downswings and upswings; ii) we do not find indications of accelerating or persistently higher inflation during and after episodes of strong declines in the long-term unemployment rate, even when they occur in country-years in which the actual unemployment rate was estimated to be below a conventionally estimated Non-Accelerating Inflation Rate of Unemployment (NAIRU). Our results call into question the role of long-term unemployment in causing hysteresis and provide support to policy implications that are at variance with the conventional wisdom that regards the NAIRU as an inflationary barrier.

Uncertainty, Wages, and the Business Cycle*

We show that limited wage flexibility in economic downturns generates strong and state-dependent amplification of uncertainty shocks. It also explains the cyclical behavior of empirical measures of uncertainty. In the presence of matching frictions, an occasionally binding constraint on downward wage adjustment enhances the concavity of firms’ hiring rule, resulting in an endogenous profit-risk premium. In turn, higher uncertainty increases the profit-risk premium when the economy operates close to the wage constraint, deepening a recession. Non-linear local projections and VAR estimates support the model predictions. In addition, we show that measured uncertainty rises in a recession even without uncertainty shocks.

Bias in Local Projections

Local projections (LPs) are a popular tool in macroeconomic research. We show that LPs are often used with very small samples in the time dimension. Consequently, LP point estimates can be severely biased. We derive simple expressions for this bias and propose a way to bias-correct LPs. Small sample bias can also lead autocorrelation-robust standard errors to dramatically understate sampling uncertainty. We argue they should be avoided in LPs like the ones we study. Using identified monetary policy shocks, we demonstrate that the bias in point estimates can be economically meaningful and the bias in standard errors can affect inference.