A new comparative approach to macroeconomic modeling and policy analysis

In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development

Law, Finance and Investment: does legal origin matter?

This paper assesses if legal origin explains domestic, foreign, private and public investments through financial intermediary channels of depth, efficiency, activity and size. Findings show that legal origin matters in the finance-investment nexus; though its ability to explain aggregate investment dynamics only through financial intermediary channels is limited in the cases of private and public investments.Law; Finance; Investment; Developing countries

Contagious Synchronization and Endogenous Network Formation in Financial Networks

When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning.Comment: 41 pages, 10 figures, Journal of Banking & Finance 201

Governing the Resource: Scarcity-Induced Institutional Change

We provide a dynamic model of natural resource management where the optimal institutional structure that governs resource use changes with resource depletion. Copeland and Taylor (2009) analyze how characteristics of a natural resource determine whether its steady-state management regime is open access, communal property, or private property. We extend this and other studies of endogenous institutions to analyze how and when resource governance may change in transition to the steady state, taking into account the fixed costs of institutional change and the variable costs of enforcement and governance. Assuming that governance cost is increasing in the difference between open-access and the actual harvest, we show that open access can be optimal if the resource is abundant relative to its demand and/or if governance costs are high. Once open access is rendered inefficient due to increased resource scarcity, further depletion warrants institutional change. In the face of set-up costs, optimal governance implies non-monotonic resource dynamics. These findings help to explain the co-evolution of resource scarcity and property rights—from open access to common property and beyond. We also extend the Demsetz/Copeland-Taylor theory of price-induced institutional change to include changing scarcity during the transition to the steady state.

Estimation of monetary policy preferences in a forward-looking model: a Bayesian approach. NBB Working Papers No. 129, 13 March 2008

In this paper, we adopt a Bayesian approach to estimating monetary policy preference parameters in a general equilibrium framework. We start out from the model presented by Smets and Wouters (2003) for the euro area, where, in the original set-up, monetary policy behaviour is described by an empirical rule. We abandon this way of representing monetary policy behaviour and instead assume that monetary policy authorities optimise an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, the output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be important target variables as well, albeit to a lesser extent. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialise our estimates by considering a pre-sample period of 40 quarters. This enables an empirical approach to the timeless perspective framework

Financial panic and emerging market funds

This article studies equity investment of emerging-market funds based on the 2003–2009 weekly data and compares the dynamics of flow and return between tranquil period and financial panic based on the experience of the latest 2008–2009 global financial crisis. First, we find that the well-documented positive feedback trading is a tranquil-period phenomenon such that it is more difficult in general for emerging-market funds to attract new investment in financial panic. Second, the predictive power of flow on return is driven by a combination of price pressure and information effects in tranquil period, while the information effect dominates in financial panic. Third, the underlying co-movements or contagion of flow across the emerging-market funds influence the association between flow and return. Overall, the findings highlight the importance of accounting for state-dependent dynamics as well as cross-regional co-movements in the analysis of flow and return

Partnerships in implementing sustainability policies theoretical considerations and experiences from Spain

The greening of economic and industrial activities requires that new relationships be formed between private actors who often never met before on the business or policy arenas. To initiate and give direction to the sustainability transition, public actors may choose to become involved in partnerships for policy implementation, next to industrial prime movers. After having catalyzed the process, new forms of public-private partnerships may emerge, in the transition towards ‘green private-private partnerships’.\ud This paper presents theoretical considerations regarding the types and evolution of publicprivate partnerships (PPPs) involved in the implementation of sustainability policies. The central argument is that PPPs are themselves in a process of transition, with changes in the types of activity, types of investment and types of financing on which partnerships focus. Empirically, the paper analyses the greening of the electricity industry in Spain and looks specifically at the cases of wind electricity and biomass technologies’ diffusion. The evolution of PPPs shows clearly that there is a transition from ‘project-vehicle-partnerships’ to ‘technology-specific-partnerships’ to ‘renewables-development-partnerships’. In parallel there is a transition from ‘internally-financed-partnerships’ towards ‘bank-financedpartnerships’ with a substantially higher diffusion potential. Finally, another transition was observed from ‘learning-partnerships’ towards ‘commercialization-partnerships’. As the greening of the electricity industry advances, there is a gradual retreat of public actors and an increase in new green private-private-partnerships. Through these analyses, the paper fits into the conference theme regarding the dynamics for public-private partnerships. In the same time it is relevant for the theme regarding the implementation of public policies and technologies to promote sustainable development. Understanding the metamorphosis of partnerships supports policy-makers to design policies facilitating wider engagement in PPPs, a more secure operation environment and a faster transition towards new green private-private partnerships in industrial activities. The paper draws in postdoctoral research and is aimed for oral presentation in the workshop “Dynamics of public-private partnerships in implementing sustainability policies”

The new keynesian approach to dynamic general equilibrium modeling: models, methods, and macroeconomic policy evaluation

This chapter aims to provide a hands-on approach to New Keynesian models and their uses for macroeconomic policy analysis. It starts by reviewing the origins of the New Keynesian approach, the key model ingredients and representative models. Building blocks of current-generation dynamic stochastic general equilibrium (DSGE) models are discussed in detail. These models address the famous Lucas critique by deriving behavioral equations systematically from the optimizing and forward-looking decision-making of households and firms subject to well-defined constraints. State-of-the-art methods for solving and estimating such models are reviewed and presented in examples. The chapter goes beyond the mere presentation of the most popular benchmark model by providing a framework for model comparison along with a database that includes a wide variety of macroeconomic models. Thus, it offers a convenient approach for comparing new models to available benchmarks and for investigating whether particular policy recommendations are robust to model uncertainty. Such robustness analysis is illustrated by evaluating the performance of simple monetary policy rules across a range of recently-estimated models including some with financial market imperfections and by reviewing recent comparative findings regarding the magnitude of government spending multipliers. The chapter concludes with a discussion of important objectives for on-going and future research using the New Keynesian framework

Impact Investing: a primer for family offices

The goal of this report is to help family offices ask the right questions as they contemplate their path into impact investing. It is important to recognize that impact investing may not suit all investors. There will be family offices which conclude impact investing is not appropriate at this stage for them. While we are passionate about the potential of impact investing, we acknowledge the best future for the sector is where each investor can make informed choices about their own best interest. Each investor and investment institution needs to evaluate if impact investing fits with its needs, interests and unique context. It is with that in mind that we offer this report as a resource and tool that family offices can use to begin the conversations internally, to craft and design their own engagement strategy on impact investing with family members, advisers and potential investees, as well as to ensure that not only is their wealth growing in value, but also that their wealth can reflect their values