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We examine whether regionally differentiated macroprudential policies can address financial stability concerns and moderate house price differences in the UK. We disaggregate both the household sector and the housing stock in a two-region DSGE model with out of sync subnational housing markets and compare four policy types: standard monetary policy, leaning against the wind monetary policy, national macroprudential policy or one that targets region-specific LTV ratios. In terms of reducing variances of house prices, regionally differentiated macroprudential policy performs best, provided the policy authorities are concerned with stabilising output and house prices rather than simply minimising the variance of inflation.

Many countries have imposed a set of non-pharmaceutical health policy interventions in an effort to slow the spread of the COVID-19 pandemic. The objective of this paper is to examine the effects of the interventions, drawing on evidence from the OECD countries. A special feature here is the mechanism that underlies the impact of the containment policies. To this end, a causal mediation analysis decomposing the total effect into a direct and an indirect effect is conducted. The key finding is a dual cause-effect channel. On the one hand, there is a direct effect of the non-pharmaceutical interventions on the various health variables. Beyond this, a quantitatively dominant indirect impact of non-pharmaceutical interventions operating via voluntary changes in social distancing is shown.

The People’s Bank of China (PBoC) has implemented numerous measures to cushion the impacts of the COVID-19 health crisis on the Chinese economy. Since the current monetary policy framework features a multi-instrument mix of liquidity tools and pricing signals, we employ a dynamic-factor modelling approach to derive a composite indicator of China’s monetary policy stance. Our quantitative assessment shows that the PBoC’s policy response to the outbreak of the COVID-19 pandemic has been swift and decisive. Specifically, our estimates reveal that the PBoC has implemented novel policy measures to ensure that commercial banks maintain liquidity access and credit provision during the COVID-19 crisis., Highlights • We construct a dynamic-factor-based indicator of China’s monetary policy stance. • Estimates reveal the PBoC’s novel policy measures during the COVID-19 crisis. • The Chinese monetary policy response to the pandemic has been swift and decisive. • The measures ensure liquidity access and credit provision by commercial banks.

We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor decreased somewhat as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations.

On 3 June 2020, the German government announced a EUR 130 billion fiscal stimulus package to stimulate market demand and jumpstart the economy in the wake of the COVID-19 pandemic lockdown in the spring of 2020. The most prominent measure of this package is an unconventional fiscal policy in the form of a temporary VAT rates cut for six months, from 1 July to 31 December 2020. Employing a dynamic stochastic general equilibrium (DSGE) framework, we study the efficiency of the VAT tax rates cut for ameliorating the consequences of the pandemic recession. The simulation of the calibrated DSGE model yields a tax policy-induced real GDP increase of about 0.3% points for 2020.

The recent upgrade of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. As the revamped policy arrangement now features a multiple-instrument mix of liquidity tools and pricing signals, we employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that comovements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline DSGE model that can be solved analytically and allows tracing of the expansionary and contractionary on-and-off phases of Chinese monetary policy.

We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. We find that the main historical drivers of house prices are shocks specific to the housing sector. While our estimates show that monetary policy has large spillover effects on house prices, it does not appear to have been a major driver of house prices in New Zealand. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting that they can be used without derailing monetary policy. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8 per cent and that greater forward guidance on their duration would have made them more effective.

In the wake of the 2008–2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. The use of loan‐to‐value (LTV) policies to curb booming property markets has long been used by Hong Kong's monetary authorities to actively manage the potential fallout from housing price bubbles. In 2013 the Hong Kong authorities supplemented the LTV policies with property transfer taxes. Here, we also analyse the merits of these tax‐based macroprudential policies in the dynamic stochastic general equilibrium framework. Furthermore, we calibrate the impact of both countercyclical macroprudential policies employed in conjunction with forward guidance. We conclude that both policy approaches can limit the pace of housing price increases. As regards the comparison of LTV and tax‐based measures, it turns out that property acquisition taxes are more effective.

This paper adds to the literature on wealth effects on consumption by disentangling house price effects on consumption for mainland China. In a stochastic modelling framework, the riskiness, rate of increase and persistence of house price movements have different implications for the consumption/housing ratio. We exploit the geographical variation in property prices by using a quarterly city-level panel dataset for the period 1998Q1 – 2009Q4 and rely on a panel error correction model. Overall, the results suggest a significant long run impact of property prices on consumption. They also broadly confirm the predictions from the theoretical model.

Renminbi internationalisation has brought about an active offshore market where the exchange rate frequently diverges from the onshore market. Using extended GARCH models, we explore the role of fundamentals, global factors and policies related to renminbi internationalisation in driving the pricing differential between the onshore and offshore exchange rates. Differences in the liquidity of the two markets play an important role in explaining the level of the differential, while rises in global risk aversion tend to increase the differential's volatility. On the policy front, measures permitting cross-border renminbi outflows have a particularly discernible impact in reducing the volatility of the pricing gap between the two markets.

The risk of catastrophes is one of the greatest threats of climate change. Yet, conventional assumptions shared by many integrated assessment models such as DICE lead to the counterintuitive result that higher concern about climate change risks does not lead to stronger near-term abatement efforts. This paper examines whether this result still holds in a refined DICE model that employs the Epstein–Zin utility specification and that is fully coupled with a dynamic tipping point model describing the evolution of the Atlantic thermohaline circulation (THC). Risk is captured by the possibility of a future collapse of the circulation and it is nourished by fat-tailed uncertainty about climate sensitivity. This uncertainty is assumed to resolve in the middle of the second half of this century and the near-term abatement efforts, which are undertaken before that point of time, can be adjusted afterwards. These modelling choices allow posing the question of whether aversion to this specific tipping point risk has a significant effect on near-term policy efforts. The simulations, however, provide evidence that it has little effect. For the more likely climate sensitivity values, a collapse of the circulation would occur in the more distant future. In this case, acting after learning can prevent the catastrophe, implying the remarkable insensitivity of the near-term policy to risk aversion. For the rather unlikely and high climate sensitivity values, the expected damage costs are not great enough to justify taking very costly measures to safeguard the THC. Our simulations also provide some indication that risk aversion might have some effect on near-term policy, if inertia limiting the speed of decarbonisation is accounted for. As it is highly uncertain how restrictive this kind of inertia will be, future research might investigate the effects of risk aversion if additional uncertainty about inertia is considered.

With recovery from the global financial crisis in 2009 and 2010, inflation emerged as a major concern for many central banks in emerging Asia. We use data observed at mixed frequencies to estimate the movement of Chinese headline inflation within the framework of a state-space model, and then take the estimated indicator to nowcast Chinese CPI infla-tion. The importance of forward-looking and high-frequency variables in tracking inflation dynamics is highlighted and the policy implications discussed.

The recent increase in China’s house prices at the national level masks tremendous variation at the city level – a feature largely overlooked in the macroprudential literature. This paper measures the evolving heterogeneity in China’s house price dynamics across 70 major cities and assesses its relationship with housing market characteristics. We gauge the heterogeneity of house price dynamics using a novel regime-switching modelling approach to estimate the time-varying patterns of China’s city-level housing price synchronization. The estimates indicate an increasing synchronization leading up to 2015, and a decoupling pattern thereafter, which is associated to the heterogeneous strength of regional macroprudential policies. After sorting city-level housing prices into four clusters sharing similar cyclical features, we document high synchronization within clusters, but low synchronization among them. The empirical evidence suggests that differentials in the growth of population, income, and air quality are relevant explanatory factors of housing price synchronization among cities.

This paper accounts for China’s economic growth since 1980 in a unified endogenous growth model in which a sequencing of physical capital accumulation, human capital accumulation and innovation drives the rise in China’s aggregate income. The first stage is characterized by physical capital accumulation. The second stage includes both physical and human capital accumulation, and in the final stage innovation is added to the mix. Model calibrations indicate that the growth model can generate a trajectory that accords well with the different stages of development in China.

This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of the central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999–2011 on the yen/US dollar dynamics.

The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting, the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD exchange rate will likely be about 7.10 RMB/USD in summer/autumn 2009.

This paper uses multivariate GARCH techniques to study volatility spillovers between the Chinese non-deliverable forward market and seven of its Asia-Pacific counterparts over the period January 1998 to March 2005. To account for the time-variability of conditional correlation, a dynamic correlation structure is included in the volatility model specification. The empirical results demonstrate that the renminbi non-deliverable forward (NDF) has been a driver of various Asian currency markets but that such co-movements exhibit a substantial degree of heterogeneity. As to the determinants of the magnitude of these co-movements, we test the relevance of potential factors and find that it is the degree of real and financial integration, in particular, that exerts the largest influence on volatility transmission.

The role of product market reforms in achieving the objective of higher employment and growth has recently received much attention amongst academics. The aim of this paper is to analyse some of the channels through which cross-market effects come about and to assess their policy relevance. The analytic strategy of this paper relies upon the stochastic real options modelling approach. In a nutshell, our simulations using numerical methods indicate that comprehensive product market reforms would increase factor demand and growth significantly in the medium and long run.

Against the backdrop of the Greek three-act tragedy, we present a theoretical framework for studying Greece’s recent debt and currency crisis. The model is built on two essential blocks: first, erratic macroeconomic policymaking in Greece is described using a stochastic regime-switching model; second, the euro area governments’ responses to uncertain macroeconomic policies in Greece are considered. The model’s mechanism and assumptions allow either for a Grexit from the euro area or, conversely, the avoidance of Greece’s default against its creditors. The model also offers useful guidance to understand key drivers of the long-winded negotiations between the Greek government and the “institutions”.

The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in China as well as useful insights for the conduct of monetary policy.

Utilising panel data for 14 East European transition economies we find support for the hypothesis that a greater degree of export variety relative to the U.S. helps to explain relative per capita GDP levels.The empirical work relies upon some direct measures of product variety calculated from 5-digit OECD trade data.Although the issue is still far from being settled, the merging conclusion is that the index of relative export varietyacross countries is significantly correlated with relative per capity income levels.

We study an overlapping generations model of human capital accumulation with threshold effects using regional data for West Germany. Our basic goal is to shed light on what makes German regions grow. The paper finds that the relative income distribution appears to be stratifying into a trimodal distribution. The results of threshold estimates imply that there is no simple relationship between income growth and human capital. The process of regional growth is marked by thresholds, pointing to the existence of different growth equilibria. Thus, application of the threshold model to a real world case, here West Germany, shows that the model might help to explain regional growth patterns.

We study a simple general equilibrium model in which wages are set by collective bargaining as a mark-up over benefits. The inclusion of taxation and the government budget complicates the relationship between employment and hours worked; hence, we present numerical simulations of employment in terms of hours. There is a range of initial hours from which employment can be increased, or unemployment reduced, by cutting standard working time. Welfare conflicts are explained, but our examples show relatively small profit reductions when hours are diminished below the employers' (collective) optimum, and substantial employment gains.

The purpose of this paper is to evaluate the efficiency of the East German economy at the firm level using an unbalanced panel over the transition period 1994 to 1998. We adopt a translog stochastic frontier model to estimate technical efficiency in eastern and western Germany. The results indicate that firms in eastern Germany are significantly less efficient than firms in western Germany. The paper also examines some of the possible correlates of regional variations in firm-level efficiency. JEL classification: D24, C33, J31, O52.

This paper takes seriously the idea that the coefficients of a VAR and the variance of shocks may be time-varying and so employs a Markov regime-switching VAR model to describe and analyse the time-varying credibility of Hong Kong’s currency board system. The endogenously estimated discrete regime shifts are made dependent on macroeconomic fundamentals. This enables us to determine which changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We carry out extensive testing to search for the most appropriate specification of the Markov regime-switching model. We find strong evidence of regime switching behaviour that portrays the timevarying nature of credibility in the historical data. Our own conditional volatility index provides anticipatory signals and amplifies the regime-switching transition probabilities.

Does product variety matter for export performance? This has been suggested by the new trade theory. In the present paper, we investigate empirically whether increasing export variety has contributed to the export growth of 10 East Asian countries. In the paper we calculate direct measures of export variety and estimate pooled annual export equations for 10 East Asian countries. The econometric results suggest that producing highly differentiated export goods gives a competitive advantage which allows to sell more products.

This paper explores the determinants of alternative monetary aggregates in Euroland. A sample consisting of quarterly data covering the 1980:1–1998:4 period is considered. We are interested whether a conventionally defined money demand equation is stable in some aggregates as opposed to others. Both long-run and short-run relationships are considered in this paper. Overall, the results indicate that broad (narrow) money demand in Euroland is a stable (unstable) function of Euroland-wide income and interest rates.

We offer some empirical evidence on the likely scale of control and indicator problems surrounding alternative monetary targets and a direct inflation target. The links between monetary policy actions and inflation are estimated in dynamic linear models using the Kalman filter. We compare alternative intermediate-target and final-target monetary strategies using German data from the end of the Bretton Woods system until 1997. The estimation results show that broad money dominates narrow money as an intermediate target, while control problems involved in targeting broad money are larger than for direct inflation targets.

We set up an endogenous growth model with physical capital, human capital and blueprints for intermediate goods. The model can generate steady-state growth or stagnation. Along the adjustment path for a developing economy we can distinguish different stages of development. The first stage is characterized by physical factor accumulation. At the second stage the economy follows a growth path which is mainly characterized by the accumulation of skills. Growth of the fully developed economy is identified by an increasing variety of goods originating from costly R&D efforts. Transition to a higher stage of development is explained endogenously. Thus, the model provides a high degree of generality by encompassing the standard neoclassical growth model and modern endogenous growth theory.

The paper analyses the interaction between capital structure and employment decisions of firms. For this purpose, a theoretical model is developed in which a firm determines employment along an optimal path taking into account financial considerations. The empirical analysis using West German micro data proves that a negative relationship exists between employment and the debt-asset ratio of the firm. We also demonstrate that as real wages (sales) increase, employment decreases (increases).

A common argument against monetary union is that it precludes stabilization of economies through monetary and exchange rate policy. We address this point by calculating the relative empirical importance of industry-specific, country-specific and aggregate disturbances using a comparable international data set comprising annual data from 1971 to 1993 for 19 OECD countries and 25 two-digit industries. The evidence seems to suggest that the country-specific shocks have declined over the last 20 years.

The objective of the paper is to investigate the linkage between financial factors and employment decisions of West German firms. The underlying model is based upon rational expectations and convex adjustment costs. The time series, cross-section estimates for the period 1989–1994 are obtained using information on individual firms contained in business surveys. We find that financial constraints can indeed restrain the level of employment in small firms. On the contrary, there is no evidence that this result applies to larger firms as well.

demand and supply shocks in the participating countries. This paper addresses that question empirically, using a bivariate VAR. Identification of the underlying orthogonal demand and supply shocks is achieved using only long-run restrictions. Data for 16 European countries

This paper tests the properties of the zloty— dollar exchange rate for the possible presence of unknown non-linearities. It concludes that there is strong evidence for the presence of an underlying non- linear process which is possibly chaotic. A non-linear model which allows for discrete switching between regimes seems to capture most of the non-linear behaviour. © 1997 by John Wiley & Sons, Ltd.

A five-variable structural vector autoregressive (SVAR) model is used in the study to test empirically the importance of demand and supply shocks in explaining German business cycles. I conclude that the dynamic properties of the estimated model match most of the stylized predictions of the standard IS-LM-Phillips curve model.

An estimated Markov-switching DSGE modeling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong's linked exchange rate system. The baseline model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. To test the sensitivity of the results, a number of robustness checks are performed. The findings contribute to efforts at modeling exchange rate regime credibility as a nonlinear process with two distinct regimes.

This paper provides a modelling framework for evaluating the exchange rate dynamics of a target zone regime with undisclosed bands. We generalize the literature to allow for asymmetric one-sided regimes. Market participants’ beliefs concerning an undisclosed band change as they learn more about central bank intervention policy. We apply the model to Hong Kong’s one-sided currency board mechanism. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities finally revamped the regime as a symmetric two-sided system with a narrow exchange rate band.

Capital-skill complementarity is tested for two different definitions of skill, using data from 32 West German manufacturing industries from 1975–1990. Using the Kmenta approximation for the CES function provides strong support for complementarity between white collar workers and capital. On the other hand, when “skill” is defined as skilled white collar and blue collar workers, we find essentially no evidence for complementarity. This surprising result suggests that the official classification of skilled production workers does not capture the planning activity most complementary to increasing capital intensity and technological progress.

This paper investigates the empirical performance of a system of investment and employment equations for the U.K. and West German manufacturing sectors. The distinguishing feature of the model is the assumption that firms face adjustment costs in changing the stock of capital and labor and that these costs are interrelated. That makes the employment and investment decisions of the firm interdependent, with employment being determined by investment and vice versa. The empirical implementation of the model for both countries is satisfactory and outperforms a rival model in which employment and investment decisions are made separately. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester

An important question for the future of European Monetary Union is whether the central banks of the European member states are fundamentally similar or are there real differences between them. Much casual evidence seems to suggest that the Bundesbank is fundamentally different in its method of operation from the other central banks. This paper attempts to find econometric evidence which may clarify this situation. It proceeds by drawing on theP* literature, which models the determination of inflation, and recent developments in the cointegration literature which allows a more complete treatment of causality than has hitherto been possible. It is argued that there does appear to be evidence that the Bundesbank operates in a qualitatively different way from the other Banks.

It has been argued that the Polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only. In this paper a range of indirect non-structural and structural tests for rational, exploding deterministic and stochastic bubbles are carried out. We adopt a new strategy based on the work of Hall and Sola (1993a) which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles.

This paper develops a two-agent, two-sector, open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. We identify strong and robust housing wealth effects, and show that property prices are mainly driven by intratemporal preference perturbations rather than by disturbances in financial frictions or price mark up shocks. These disturbances also explain a non-negligible part of the volatility of consumption, GDP and employment.