Epstein-Zin preferences and their use in macro-finance models: implications for optimal monetary policy

Epstein-Zin preferences have attracted significant attention within the macro-finance literature based on DSGE models as they allow to substantially increase risk aversion, and consequently generate non-trivial risk premia, without compromising the ability of standard models to achieve satisfactory macroeconomic data coherence. Such appealing features certainly hold for structural modelling frameworks where monetary policy is set according to Taylor-type rules or seeks to minimize an ad hoc loss function under commitment. However, Epstein-Zin preferences may have significant quantitative implications for both asset pricing and macroeconomic allocation under a welfare-based monetary policy conduct. Against this background, the paper focuses on the impact of such preferences on the Ramsey approach to monetary policy within a medium-scale model based on Smets and Wouters (2007) including a wide range of nominal and real frictions that have proven to be relevant for quantitative business cycle analysis. After setting an empirical benchmark that generates a mean value of 100 bp for the ten-year term premium, we show that Epstein-Zin preferences significantly affect the macroeconomic outcome when optimal policy is considered. The level and the dynamic pattern of risk premia are also markedly altered. We show that the effect of Epstein-Zin preferences is extremely sensitive to the presence of real rigidities in the form of quasi-kinked demands. We also analyse how this effect can be linked to a combined e¤ect of capital accumulation and wage rigidities. JEL Classification: E44, E52, E61, G12macroeconometric equivalence, non time-separable preferences, optimal monetary policy, term premium

The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries.

The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. This paper uses a DSGE model of a two-sector small open economy, to address the following question: How do the Maastricht convergence criteria modify optimal monetary policy in an economy facing domestic and external shocks? First, we derive the micro founded loss function that represents the objective function of the optimal monetary policy not constrained to satisfy the criteria. We find that the optimal monetary policy should not only target inflation rates in the domestic sectors and aggregate output fluctuations but also domestic and international terms of trade. Second, we show how the loss function changes when the monetary policy is constrained to satisfy the Maastricht criteria. The loss function of such a constrained policy is characterized by additional elements penalizing fluctuations of the CPI inflation rate, the nominal interest rate and the nominal exchange rate around the new targets which are potentially different from the steady state of the unconstrained optimal monetary policy. Under the chosen parameterization, the unconstrained optimal monetary policy violates two criteria: concerning the CPI inflation rate and the nominal interest rate. The constrained optimal policy results in targeting the CPI inflation rate and the nominal interest rate that are 0.7% lower (in annual terms) than the CPI inflation rate and the nominal interest rate in the countries taken as a reference. The welfare costs associated with these constraints need to be offset against credibility gains and other benefits related to the compliance with the Maastricht criteria that are not modelled. JEL Classification: F41, E52, E58, E61EMU accession countries, Maastricht convergence criteria, optimal monetary policy

What do asset prices have to say about risk appetite and uncertainty?

Implied volatility indices should have information about risk parameters, once they are cleansed of the influence of normal volatility dynamics and macro-economic uncertainty. Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the VIX and the credit spreads while controlling for realized volatility, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that implied volatilities contain a substantial amount of information regarding risk aversion whereas credit spreads have a lot to say about both risk aversion and uncertainty. Moreover, there is a significant comovement in the German and US risk aversion. JEL Classification:Credit Spread, Economic uncertainty, risk aversion, Time variation in risk and return, Volatility dynamics

New insights on Cu origin and fate from combined chemical extraction and ᵟ⁶⁵Cu isotopic composition: Application to Cu transfers in a Mediterranean vineyard catchment

Repeated use of Cu based fungicides (Bordeaux mixture: Ca(OH)2+CuSO4) to control vine downy hasled to signi!cant increase of Cu in vineyard soils. In Mediterranean catchments, brief and intense flood events can multiply stream discharge by up to 10 and are responsible for important soil leaching and therefore for high "uxes of Cu exported at the outlet of the catchment. In order to assess the origin and fate of Cu measured in the Baillaury catchment (South of France, combined sequential extraction (SCE) and isotopic Cu compositions (δ65Cu) approaches are proposed in this study

La Gran Recesión y el diferencial salarial por género en España

El artículo examina la evolución de las diferencias salariales entre hombres y mujeres en España entre los años 2002 y 2010. La evidencia obtenida sugiere que el notable empeoramiento de la coyuntura económica tras el inicio de la Gran Recesión ha tenido dos impactos reseñables sobre el diferencial salarial por razón de género. El primero es que se ha revertido la tendencia hacia la reducción de la brecha salarial por género que se venía produciendo en la economía española con anterioridad, durante la expansión económica. El segundo es que se ha generado un perfil creciente de la brecha salarial a lo largo de la distribución de salarios coincidente con el fenómeno de techo de cristal observado para otros países, pero no en períodos previos para España.This article examines the evolution of the gender wage gap in Spain between 2002 and 2010. The evidence suggests that the significant worsening of the economic situation after the onset of the Great Recession has had two significant impacts on the gap. The first is that it has reversed the trend towards the reduction of the gender pay gap in the Spanish economy during the previous economic expansion. The second is that it has generated a growing profile of the wage gap across the wage distribution which is consistent with the glass ceiling phenomenon observed for other advanced countries, but not in previous periods for Spain.Este trabajo se ha beneficiado de la financiación del proyecto de investigación CSO2011-29943-C03-02 del Ministerio de Educación, Cultura y Deporte

Epstein-Zin preferences and their use in macro-finance models: implications for optimal monetary policy

Epstein-Zin preferences have attracted significant attention within the macro-finance literature based on DSGE models as they allow to substantially increase risk aversion, and consequently generate non-trivial risk premia, without compromising the ability of standard models to achieve satisfactory macroeconomic data coherence. Such appealing features certainly hold for structural modelling frameworks where monetary policy is set according to Taylor-type rules or seeks to minimize an ad hoc loss function under commitment. However, Epstein-Zin preferences may have significant quantitative implications for both asset pricing and macroeconomic allocation under a welfare-based monetary policy conduct. Against this background, the paper focuses on the impact of such preferences on the Ramsey approach to monetary policy within a medium-scale model based on Smets and Wouters (2007) including a wide range of nominal and real frictions that have proven to be relevant for quantitative business cycle analysis. After setting an empirical benchmark that generates a mean value of 100 bp for the ten-year term premium, we show that Epstein-Zin preferences significantly affect the macroeconomic outcome when optimal policy is considered. The level and the dynamic pattern of risk premia are also markedly altered. We show that the effect of Epstein-Zin preferences is extremely sensitive to the presence of real rigidities in the form of quasi-kinked demands. We also analyse how this effect can be linked to a combined e¤ect of capital accumulation and wage rigidities

Is fertility related to religiosity?-Evidence from Spain

Preferences, including preferences for children, are shaped during the formative years of childhood. It is therefore essential to include exposure to religious practice during childhood in an attempt to establish a link between religiosity and fertility. This path has not been explored in the documented literature that looks at the relationship between current religiosity (measured by one dichotomous church attendance variable) and fertility. The International Social Survey Programme: Religion 2 (ISSP) provides the data base. It includes information on maternal/paternal/own mass participation when the respondent was a child (nine levels each), as well as on his current churchgoing (six levels) and prayer habits (eleven levels).These variables are included as explanatory variables in 'fertility equations' that explain the number of children of Catholic women in Spain. The core findings are that exposure to religiosity during the formative years of childhood, has a pronounced effect on women's 'taste for children' that later on translates into the number of her offspring. The two parents have major effects on women. However, interestingly, while an intensively practicing father encourages the daughter to have more children (by about 0.8, on average), an intensively practicing mother has a negative effect on the daughter s birth rate, leading to lower fertility by one child. Current religiosity seems to be irrelevant. It follows that religiosity and fertility are interrelated but the mechanism is probably different from the simplistic causality that is suggested in the literature.fertility, religion, Catholic, Church attendance, prayer, parental religiosity, taste for children, Spain.

Identification of new Keynesian Phillips Curves from a global perspective.

New Keynesian Phillips Curves (NKPC) have been exten-sively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macro-economic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global per-spective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC

A Simulator of Waiting Line Problems

Demand and supply of service are complicatedly related with the balance between fixed capital and circulating capital, movement to the left or right side from a break-even point, and other factors. If there is the disproportion between demand and supply of service, the waiting line to take a service will vary, and in some cases, fixed equipment will not be employed effectively. This report presents trial manufacture of the experimental equipment for waiting line problems