Discussion papers 2016

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Agénor, P-R., Flamini, A., (2016). 'Institutional Mandates for Macroeconomic and Financial Stability', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 231.

The performance of alternative institutional policy mandates for achieving macroeconomic and financial stability is studied in a model with financial frictions. Based on different level of coordination, these mandates involve goal-integrated, goal-distinct, and common-goal mandates for the monetary authority and the financial regulator. In the first case, featuring full coordination, both monetary and macroprudential policies are set optimally, but in the last two cases, featuring no or partial coordination, monetary policy only is set optimally whereas macroprudential policy is implemented through a simple, credit-based reserve requirement rule. The model is parameterized and used to simulate responses to a financial shock. The analysis shows that the benefit of using the required reserve ratio is substantial only under the goal-integrated mandate. In addition, it is optimal to delegate the financial stability goal solely to the monetary authority when the financial regulator is only equipped with a credit-based reserve rule. The key reason for these findings is that only coordination via the integrated mandate can fully internalize the policy spillovers which adversely affect economic stability.

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Chouliarakis, G., Gwiazdowski, T., Lazaretou, S., (2016). 'The Effect of Fiscal Policy on Output in Times of Crisis and Prosperity: Historical Evidence From Greece ', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 230.

Empirical analysis of a unique and unexplored historical dataset for Greece provides new insight into the state and regime dependence of the government spending multiplier. Greece fought numerous wars between the establishment of the modern Greek state and the outbreak of World War II. Using data for both armament and disarmament, and controlling for states and regimes in the economy, our empirical findings suggest that the exchange rate regime, the presence of exchange controls, and the business cycle all have a significant impact on the size of the government spending multiplier. However, analysing the interaction of these states and regimes turns out to be crucial to removing the bias from our multiplier estimates. In particular, regardless of other states and regimes in the economy, the multiplier is estimated to be zero during good times. In contrast, it is well above unity when spending decreases in a recession.

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Sensier, M., Artis, M., (2016). 'The Resilience of UK Regional Employment Cycles ', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 229.

This paper dates the classical business cycle of quarterly UK GDP, unemployment, aggregate and regional employment to assess turning points in the economic cycle. We analyse synchronisation of the regions with UK employment and investigate which regions lead into recession. We perform the McNemar Test on groups of regions and arrive at Northern and Southern regional clusters. We find that the northern regions have had a greater incidence of recession with southern regions suffering more severe recessions (in terms of total jobs lost). Finally we compare the resilience of the regional employment cycle to UK employment. This most resilient region to the 2008 recession was London from our Southern grouping and the least resilient has been the Northern Ireland in our northern grouping.

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Nguyen, A.D.M., Onnis, L., Rossi, R. (2016). 'The Macroeconomic Effects of Income and Consumption Tax Changes', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 227.

Do income and consumption tax changes affect the economy differently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The effects of consumption tax cuts are modest and not statistically different from zero on GDP and investment and only marginally expansionary on private consumption. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.

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Agénor, P-R., Pereira da Silva, L., (2016). 'Capital Requirements, Risk Taking and Welfare in a Growing Economy', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 226.

The effects of capital requirements on risk-taking and welfare are studied in an overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky, more productive but socially inefficient, technology. Bank risk-taking is endogenous. As a result of a skin in the game externality, default risk is inversely related to the capital adequacy ratio. Numerical simulations show that in an equilibrium where banks extend both safe and risky loans, this externality must be sufficiently strong for a welfare-maximizing regulatory policy to exist. However, the optimal capital adequacy ratio may be too high in practice and may require concomitantly a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.

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Pidkuyko, M., (2016). 'When the Going Gets Tough: Durable Consumption and the Equity Premium', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 225.

I present an endowment economy where a representative agent has recursive preferences over the consumption of non-durable and durable goods, and uncertainty about the underlying endowments. Using parameter calibration consistent with real business cycle literature (risk aversion coefficient of 2.1 and elasticity of intertemporal substitution of 1.09), the model generates a high level of equity premium and a low and stable risk-free rate. The model is also able to explain up to 60% of the equity volatility. The volatile expenditure on durable consumption goods generates a high and volatile equity premium; endogenous time-varying uncertainty produces a counter-cyclical equity premium.

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Altansukha, G., Becker, R., Bratsiotis, G., Osborn, D.R.,  (2016). 'What is the Globalisation of Inflation?', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 224.

This paper studies the globalisation of CPI inflation by analysing core, energy and food components, testing for structural breaks in the relationships between domestic inflation and a corresponding country-specific foreign inflation series at the monthly frequency for OECD countries. The iterative methodology employed separates coefficient and variance breaks, while also taking account of outliers. We find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s, compatible with the introduction of inflation targeting in many countries of our sample. There is less evidence of increased synchronisation of short run movements in core than aggregate inflation, but an increased role for short run foreign energy inflation often contributes to the globalisation effect.

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Berardi, M., (2016). 'Herding through learning in an asset pricing model', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 223.

In this paper we show how uncertainty and learning can lead to a disconnection between fundamental values and prices in a simple asset pricing model. Agents use prices, besides an idiosyncratic exogenous signal, to infer fundamental values: as agents accumulate information, they put increasing weight on the public signal and in the limit they ignore completely their private information. The Bayesian equilibrium implies that agents end up relying only on prices in their signal extraction problem, an outcome that reminds the rational herding result in sequential decision making. We also consider two extensions that should mitigate this effect, namely constant gain adaptive learning and Bayesian learning with an explicit probability of change in the fundamental. In both cases the problem persists, though somewhat mitigated. As a by-product, we also establish a connection between the constant gain parameter in adaptive learning and the subjective probability of exogenous changes in Bayesian learning.

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Chuku, C., Middleditch, P.,  (2016). 'Characterizing monetary and fiscal policy rules and interactions when commodity prices matter', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 222.

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Using conventional rules to characterize policy behaviour in emerging market economies requires innovations capable of capturing distinctive structural characteristics. We examine the extent to which commodity price fluctuations matter for monetary and fiscal policy formulation in high primary commodity export economies. Markov mixture specifications of monetary and fiscal policy rules stylized to account for commodity price slacks are estimated using specifically designed Bayesian techniques. We find that policy authorities indeed respond to commodity price slacks but with variations depending on the policy regime in place and country. The results hold implications for the correct specification of policy rules and interactions in DSGE models for such economies.


Bataa, E., Osborn, D.R., Sensier, M., (2016). 'China's Increasing Global Influence: Changes in International Growth Spillovers', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 221.

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In the light of China's increasing importance in the global economy, we investigate changes in the international spillovers of quarterly GDP growth rates since 1975 in a system consisting of the USA, Euro area and China. Utilizing an iterative procedure for detecting structural breaks in the VAR coefficients and covariance matrix, we find dynamics to be unchanged, but volatilities change in 1983, 1993 and 2007, with cross-country correlations markedly increasing around the time of the Great Recession. This recent period consequently shows increased international growth spillovers, measured through generalized impulse responses. Although largely isolated from the other large economies until 2007, growth in China is subsequently important for both the US and the Euro area. At the same time, the volatility of China's growth becomes more closely associated with these other large economies, especially the US in terms of net volatility spillovers.


Capasso, S., Neanidis, K.C., (2016). 'Domestic or Foreign Currency? Remittances and the Composition of Deposits and Loans', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 220.

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This paper investigates the effects of remittance receipts on the currency composition of deposits and loans in the home-country banking system. For this objective, we first develop a simple model that links remittance flows to the decisions of households and firms with regard to the optimal share of deposits and loans, respectively, held in the form of foreign currency. We, then, examine empirically the relevance of the theoretical predictions for fourteen Central and Eastern European countries over the last two decades. Both the theoretical and empirical findings underpin the importance of remittances for the currency composition of bank’s balance sheets, pointing to a mismatch between deposits and loans: remittances raise the share of foreign currency loans whilst they reduce the share of foreign currency deposits.


Agénor, P-R., (2016). 'Aid Volatility, Human Capital, and Growth', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 219.

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This paper studies the effect of aid volatility on growth, in a model where the decision to invest in skills is endogenous. The analysis focuses on a low-income economy where the cost of acquiring education benefits from public subsidies, which are partly financed through foreign aid. Thus, aid plays a critical role in determining the distribution of skills across workers. By creating uncertainty about the net return to education, a high degree of aid volatility mitigates agents' incentives to invest in skills. If savings and growth depend on the composition of the labor force, and if more able workers are more productive, aid volatility may have an adverse effect on the mean growth rates of investment and output. Aid volatility may therefore contribute to the persistence of a stagnation equilibrium.


Agénor, P-R., (2016). 'Growth and Welfare Effects of Macroprudential Regulation', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 218.

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This paper studies the growth and welfare effects of macroprudential regulation in an overlapping generations model of endogenous growth with banking and agency costs. Indivisible investment projects combine with informational imperfections to create a double moral hazard problem à la Holmström-Tirole and a role for bank monitoring. When the optimal monitoring intensity is endogenously determined, an increase in the required reserve ratio (motivated by systemic risk considerations) has conflicting effects on investment and growth. On the one hand, requiring banks to put away a fraction of the deposits that they receive reduces the supply of loanable funds. On the other, a higher required ratio raises incentives to save and mitigates banks' incentives to monitor, thereby lowering monitoring costs and freeing up resources to increase lending. In addition, it may mitigate the systemic risk externality associated with excessive leverage. This trade-off can be internalized by choosing the required reserve ratio that maximizes growth and welfare. However, the risk of disintermediation means that in practice financial supervision may also need to be strengthened, and the perimeter of regulation broadened, if the optimal ratio is relatively high.