Real Estate, Economic Stability and the New Macro-Financial Policies

The influence of real estate on finance and the whole economy has captured significant attention, especially since the aftermath of the Great Recession, because of the potential of this sector to destabilize markets. This paper explores the other way around: housing markets’ capacity to stabilize the economy through different macroprudential policies facing several types of shocks to achieve financial stability as a driver of sustainability. Specifically, a dynamic stochastic general equilibrium model is used to evaluate the effectiveness to stabilize the economy of different macroprudential tools based on the loan-to-value ratio for real estate, on the countercyclical capital buffer for the financial sector and a combination of both tools, facing a housing price shock, a technology shock and a financial shock. The model presents three types of agents (borrowers, entrepreneurs and banks) in an economy with a real estate market, a financial sector, a labor market and a production sector. The government can use different macroprudential policies to stabilize the economy, leaning against the wind of several shocks to achieve economic and financial sustainability. The assessment of the effectiveness of each policy shows that, in the case of a housing sector shock and a technology shock, the more effective policy is the one based on a countercyclical rule on the loan-to-value ratio for the real estate sector as a macroprudential tool. Furthermore, with a house price shock, if the macroprudential authority applies a macroprudential policy based on the countercyclical capital buffer, the shock may be exacerbated. Additionally, when there is a financial shock, the macroprudential authority may face a trade-off between several macro-financial policies depending on its objective. Therefore, it is not recommendable to automatically apply a macroprudential policy without a meticulous analysis of the nature of the shock that the economy is experimenting with and how different policies can stabilize or destabilize the different markets and, therefore, reach higher or lower sustainability.

Research Insights: How Do Job and Worker Flows Respond to Firms' Idiosyncratic Technology and Demand Shocks?

Permanent demand shocks are the main driver of labor adjustments. A one standard deviation demand shock increases the net employment rate by 6 percentage points in the long run, while a technology shock increases it by 0.5. Transitory demand shocks have much smaller impacts. When hit by a permanent demand shock, firms adjust fast and symmetrically. Most of the labor change occurs within a year. If the shock is positive, firms adjust by increasing hires. If the shock is negative, they increase separations without reducing hires.

THE CONDITIONAL INS AND OUTS OF FRENCH UNEMPLOYMENT

In this paper, I investigate the conditional contributions of the ins and outs of unemployment from both empirical and theoretical perspectives. Based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) theoretical framework, I estimate a sign restriction Vector Auto Regressive (VAR) model using French data. To identify the origins of unemployment dynamics in terms of worker transition rates, I simulate two shocks: one on the supply side (technology) and the other on the demand side (monetary). The VAR model reveals that the contributions of transition rates in explaining unemployment differ across shocks. After a technology shock, unemployment fluctuations are mainly explained by the job finding process, while the contributions of the two margins are more balanced for the monetary shock. The theoretical model is not able to reproduce the underlying mechanisms inducing unemployment. In particular, the conditional contributions of the job separation margin are overestimated each time. For instance, after a technology shock, 60% of unemployment changes are generated by this margin, while the data suggest a contribution of 28%. This paper strongly indicates that, in its standard formulation, a search and matching DSGE model featuring endogenous job separations is not able to replicate the dominating influence of the outflow process.

Decomposition of the Business Cycle Shock and the Default Rate of SMEs in Korea

This paper, through a structural VAR identified by a long-run restriction which is imposed by a neoclassical growth model, decomposes the real price index of capital accumulation (= deflator for fixed capital accumulations/consumption expenditure deflator), labor productivity (= real GDP/total employee hours), and total employee hours into three business cycle shocks: (i) investment-specific technology shock, (ii) neutral technology shock, and (iii) non-technology shock, and explores which shock has played a significant role in contributing to decreases in the default rate of SMEs. Empirical results drawn from Korean data spanning from 2000:Q1 to 2016:Q2 indicate that when the two technology shocks arise by 1%p, the default rate decreases by 0.03%p to 0.05%p permanently. In contrast, the impact of the non-technology shock on the default rate is highly transitory : the default rate decreases by 0.02%p in response to the 1%p increment in non-technology shock but turns back to its initial level after about three quarters. These imply the technology shocks could account for the most of variations in the default rate of SMEs. Our empirical results, therefore, deliver the policy implication that SME financing should focus on innovative firms with aggressive funding.

TECHNOLOGY SHOCKS AND HOURS WORKED: A CROSS-COUNTRY ANALYSIS

We reassess the evidence for (or against) a key implication of the basic real business cycle model: that aggregate hours worked increase in response to a positive technology shock. Two novel aspects are the scope (14 OECD countries) and the inclusion of data on both labor supply margins to analyze the key margin of adjustment in aggregate hours. The short-run response of aggregate hours to a positive technology shock is remarkably similar across countries, with an impact fall in 13 out of 14 countries. In contrast, its decomposition into intensive and extensive labor supply margins reveals substantial heterogeneity in labor market dynamics across OECD countries. For instance, movements in the intensive margin are the dominant channel of adjustment in aggregate hours in 6 out of 14 countries of our sample, including France and Japan.

An Empirical Study of Taiwan’s Real Business Cycle

We study the characteristics of the real business cycle and the sources of the economic fluctuation in Taiwan over the last forty years, when it experienced both developing and developed stages of the economy, by considering a small open economy real business cycle model with financial friction. In particular, the breaking time point that distinguishes between developing and developed stages of the economy in Taiwan is chosen on the basis of the International Monetary Fund (IMF). We use a Bayesian approach to obtain the posterior densities for the structural parameters of interest. Conditioning on the Bayesian point estimates, the posterior mean in particular, we generate a set of statistical moments and related statistics that characterize the features and sources of the real business cycle. We find that a real business cycle model with financial friction explains the features of real business cycle in a developing stage of Taiwan’s economy well. However, the results it provides are unsatisfactory for matching the characteristics of real business cycle in a developed stage of Taiwan’s economy. In addition, the technology shock explains a large fraction of the economic fluctuation, particularly in real output, consumption and investment. More precisely, permanent technology shock explains a larger fraction of the economic fluctuation than a transitory technology shock.

Welfare Implications of Alternative Monetary Policy Rules: A New Keynesian DSGE Model for Turkey

In recent years, there has been extensive research on the conduct of monetary policy in small open economies that are subject to inflation and output fluctuations. Policymakers should decide whether to implement strict inflation targeting or to respond to the changes in output fluctuations while conducting monetary policy rule. This study aims to examine the response of alternative monetary policy rules to Turkish economy by means of a DSGE model that is subject to demand and technology shocks. The New Keynesian model we used is borrowed from Gali (2015) and calibrated for the Turkish economy. Welfare effects of alternative Taylor rules are evaluated under different specifications of central bank loss function. One of the main findings of this paper is that in the case of a technology shock, strict inflation targeting rules provide the minimum welfare loss under all loss function configurations. On the contrary, the losses are weakened if the monetary authority responds to output fluctuations in the presence of a demand shock. Finally, there exists a trade-off between the volatility of output and inflation in case of a technology shock, while the volatility of both variables moves in the same direction in response to a demand shock.

PATTERNS OF UNEMPLOYMENT DYNAMICS IN GERMANY

Using a structural vector autoregressive (SVAR) model, this paper provides deeper insight into unemployment dynamics in Germany. We identify a technology shock and two policy shocks that play a central role in business cycle research. Accordingly, we enrich the discussion on the sources of unemployment dynamics by considering demand-side impulses. The worker reallocation process varies substantially with the identified shocks. The job-finding rate plays a larger role after a technology shock and a monetary policy shock, whereas the separation rate appears to be the dominant margin after a fiscal policy shock. Technology shocks turn out to be relatively important for variations in the transition rates. Regarding policy shocks, our results point toward fiscal interventions as a promising instrument but with several limitations.