An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play

In this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution.Yield curve; Recursive preferences; Logistic stochastic volatility; Nonlinear Kalman filter; Quadrature-based methods.

Ahorro y crecimiento económico: evidencia empírica de causalidad para el período 1970-2002

El ahorro es un tema de discusión siempre presente en los diversos ámbitos académicos, políticos y sociales del país. Es así porque el ahorro es considerado un elemento esencial en el proceso de acumulación de capital y para el crecimiento económico. Tal fenómeno ejerce presión sobre el nivel de ahorro en el país y sobre la necesidad de recursos. Por ello, es clara la importancia de un estudio acerca del ahorro en Ecuador, de las cuales hay que identificar su comportamiento y su relación con otras variables para proponer medidas que impulsen el crecimiento económico. Así pues, la hipótesis fundamental de la presente investigación parte del hecho de que para generar mayor ahorro interno hay que incentivar el crecimiento económico como fuente sana de financiamiento. Por tanto, no se pude incrementar el ahorro interno sino no hay estabilidad económica. Esto significa que se debe hacer sostenible el crecimiento del PIB, fortalecer la balanza de pagos y estabilizar las tasas de interés. Para ello, se realiza un estudio econométrico de la causalidad entre el ahorro y el crecimiento económico de Ecuador, establecer los determinantes del ahorro interno y señalando las relaciones de largo plazo entre las variables

Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy

In this paper I formulate, solve and estimate an endowment version of a macroeconomic dynamic stochastic general equilibrium model with monetary and fiscal policy rules whose coefficients are time-varying and contemporaneously correlated. The aim of the paper is to identify from data the interactions between monetary and fiscal policies that have prevailed in the U.S. economy. The monetary authority uses a Taylor rule and the fiscal authority uses a rule in which taxes respond to lagged debt deviations. Policy rule coefficients are modeled as logistic functions of stationary correlated latent factors, introducing long-run interactions between monetary and fiscal policies. There are three main findings of the paper: First, monetary policy has reacted strongly to inflation deviations along, almost, the entire analyzed period, with a loose policy only during the periods 1979:1-1981:3 and 2008:4-2009:2. Second, regimes under which a determinacy condition is in place occur 54.25% of the time, while regimes with exploding local dynamics occur 45.34% of the time, and there is an association between the duration of these unstable regimes and the volatility of inflation. Third, tightening monetary policy in terms of increasing the reaction of the central bank with respect to inflation deviations, given the situation of the economy in the third quarter of 2010, implies an increase in inflation of the order of 3%

An Equilibrium Model of the Term Structure of Interest Rates: Recursive Preferences at Play

In this paper we analyze the performance of an equilibrium model of the term structure of the interest rate under Epstein-Zin/Weil preferences in which consumption growth and inflation follow a VAR process with logistic stochastic volatility. We find that the model can successfully reproduce the first moment of yields and their persistence, but fails to reproduce their standard deviation. The filtered stochastic volatility is a good indicator of crises and shows high persistence, but it is not enough to generate a slowly decaying volatility of yields with respect to maturity. Preference parameters are estimated to be about 4 for the coefficient of relative risk aversion and infinity for the elasticity of intertemporal substitution

Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients

In this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime

Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy

In this paper I formulate, solve and estimate an endowment version of a macroeconomic dynamic stochastic general equilibrium model with monetary and fiscal policy rules whose coefficients are time-varying and contemporaneously correlated. The aim of the paper is to identify from data the interactions between monetary and fiscal policies that have prevailed in the U.S. economy. The monetary authority uses a Taylor rule and the fiscal authority uses a rule in which taxes respond to lagged debt deviations. Policy rule coefficients are modeled as logistic functions of stationary correlated latent factors, introducing long-run interactions between monetary and fiscal policies. There are three main findings of the paper: First, monetary policy has reacted strongly to inflation deviations along, almost, the entire analyzed period, with a loose policy only during the periods 1979:1-1981:3 and 2008:4-2009:2. Second, regimes under which a determinacy condition is in place occur 54.25% of the time, while regimes with exploding local dynamics occur 45.34% of the time, and there is an association between the duration of these unstable regimes and the volatility of inflation. Third, tightening monetary policy in terms of increasing the reaction of the central bank with respect to inflation deviations, given the situation of the economy in the third quarter of 2010, implies an increase in inflation of the order of 3%

Dolarización: efectos y riesgos en el caso ecuatoriano

This paper analyzes the effects of dollarization on the trend and volatility of key Ecuadorian macroeconomic aggregates such as inflation and economic growth rates. Additionally, it analyzes whether the current account balance and the fiscal deficit, variables associated with the sustainability of dollarization, have undergone structural changes due to the mentioned monetary system. The results indicate that inflation experiences a negative trend that is worrisome because of the possible consequences on the stability of the financial system, while economic growth does not seem to have become more volatile than before dollarization. Regarding the fiscal deficit, there is evidence of a recent regime of high-sustained deficits that would lead to a fiscal consolidation with collateral effects on the macroeconomy. These effects are not related to dollarization, but may affect its sustainability. Finally, although the current account balance does not show a structural change since the implementation of dollarization, the balance of non-oil trade balance does appear to have undergone a change in its structure since 2000, as it presents greater deficits. There is evidence that this regime would have given way to another characterized by smaller deficits since the decline of oil prices in mid-2014

Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy

In this paper I formulate, solve and estimate an endowment version of a macroeconomic dynamic stochastic general equilibrium model with monetary and fiscal policy rules whose coefficients are time-varying and contemporaneously correlated. The aim of the paper is to identify from data the interactions between monetary and fiscal policies that have prevailed in the U.S. economy. The monetary authority uses a Taylor rule and the fiscal authority uses a rule in which taxes respond to lagged debt deviations. Policy rule coefficients are modeled as logistic functions of stationary correlated latent factors, introducing long-run interactions between monetary and fiscal policies. There are three main findings of the paper: First, monetary policy has reacted strongly to inflation deviations along, almost, the entire analyzed period, with a loose policy only during the periods 1979:1-1981:3 and 2008:4-2009:2. Second, regimes under which a determinacy condition is in place occur 54.25% of the time, while regimes with exploding local dynamics occur 45.34% of the time, and there is an association between the duration of these unstable regimes and the volatility of inflation. Third, tightening monetary policy in terms of increasing the reaction of the central bank with respect to inflation deviations, given the situation of the economy in the third quarter of 2010, implies an increase in inflation of the order of 3%

Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients

In this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime