DSGE Modeling

In this project, we challenge the conventional wisdom on exchange rate predictability with the Taylor rule (Molodtsova & Papell, 2009; Rossi, 2013) by employing the vector error correction model (VECM) when the cointegration (CI) rank of our multivariate model is greater than one and less than full. Even though our approach is quite bounded to the finding of a suitable CI rank, our predictions are quite good when compared to a driftless random walk as a benchmark in the long run, whilst the performance in the short run is not. Notwithstanding we claim that we could also obtain better results had we been able to perform a static forecast for three months ahead rather than one (the latter is the only case admitted by the gretl software).

Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may reduce markups and foster riskier behavior, concentrated banking systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. The results reveal that oligopolistic competition amplifies the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. The desirable banking market structure is determined according to financial stability and social welfare objectives. Moreover, we find that depending on policymakers' preferences, a banking concentration of five to eight banks balances social welfare and bank stability objectives in the United States.

Por otro lado, un salario real más alto hace posible que el consumo aumente sin sacrificar el ocio. Asimismo, un salario real más alto implicará un aumento/decremento del ocio siempre y cuando el efecto renta sea mayor/menor al efecto sustitución (Costa, 2018).

 We propose a refinement of Ascari's (2004) model by introducing two theoretical important ingredients.  We propose a re-evaluation of the macroeconomic effects of non-zero trend inflation.  The omission of some important theoretical ingredients significantly distorts the results obtained to date.

This paper considers the persistence puzzle unveiled by Chari, Kehoe, and MacGratten (2000, Econometrica 68, 1151-1179). Our findings show that endogenously persistent output dynamics are not a puzzle for the standard sticky-price model once roundabout production is taken into account. We make this point using a new-Keynesian framework emphasizing an inertial mechanism called the multiplier for price stickiness in the spirit of Basu (1995).

In the current New Keynesian literature, the role of monetary aggregates is generally neglected. Yet it's hard to imagine money completely "passive" to the rest of the system. By entering real money balances in a non-separable utility function, we introduce an explicit role for money via preference redefinition in a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. It involves new inflation and output gap specifications where money plays a significant role. We use the General Method of Moments (GMM) to calibrate our DSGE model of the Euro area and we show that the European Central Bank-ECB) should react more strongly to economic shocks as far as the role of money is found significant.

This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.

In this study, we investigate forecasting performance of various univariate and multivariate models in predicting inflation for different horizons. We design our forecast experiment for the post-oil boom years of 2010-2014 and compare forecasting ability of the different models with that of naïve ones. We find that for all forecast horizons simple naïve models have equal forecasting ability with relatively sophisticated models which allow for richer economic dynamics. To check whether forecasting ability of naïve models has not been inferior to relatively sophisticated ones in boom and pre-boom years as well, we repeat our forecast experiment and estimate the models for the period 2003-2006 and keep the years 2006-2010 for undertaking pseudo out-of-sample exercise. Our experiment reveals that surprising forecasting performance of naïve models in post-oil boom years is a new phenomenon and in fact, the employed models have exhibited significant forecasting advantage over naïve ones in boom and pre-boom years. We find that despite declining volatility in inflation over the post-oil boom years, it has become considerably difficult for our models to beat naïve ones due to recently unpredictable behavior of inflation.

The standard new Keynesian monetary policy problem is, in its original presentation, a linear model. As a result, only three possibilities are admissible in terms of long term dynamics: the equilibrium may be a stable node, an unstable node or a saddle point. Fixed point stability (a stable node) is generally guaranteed only under an active monetary policy rule. The benchmark model also considers extremely simple assumptions about expectations (perfect foresight is frequently assumed). In this paper, one inquires how a change in the way inflation expectations are modelled implies a change in monetary policy results when an active Taylor rule is taken. By assuming that inflation expectations are constrained by the evolution of the output gap, we radically modify the implications of policy intervention: endogenous cycles, of various periodicities, and chaotic motion will be observable for reasonable parameter values.

The standard new Keynesian monetary policy problem is, in its original presentation, a linear model. As a result, only three possibilities are admissible in terms of long term dynamics: the equilibrium may be a stable node, an unstable node or a saddle point. Fixed point stability (a stable node) is generally guaranteed only under an active monetary policy rule. The benchmark model also considers extremely simple assumptions about expectations (perfect foresight is frequently assumed). In this paper, one inquires how a change in the way inflation expectations are modelled implies a change in monetary policy results when an active Taylor rule is taken. By assuming that inflation expectations are constrained by the evolution of the output gap, we radically modify the implications of policy intervention: endogenous cycles, of various periodicities, and chaotic motion will be observable for reasonable parameter values.

In this paper, we estimate at the same time a VAR and a Dynamic Stochastic General Equilibrium model (DSGE) for the Venezuelan economy using Bayesian methods. The results show that the estimated VAR has a better predictive performance than traditional VAR. The DSGE response to a monetary shock and its transmission mechanism agree with economic theory, the product shrinks and this reduces inflation. The estimation technique is robust enough to deal with economies that do not have a stable behavior.

Based on a threshold monetary policy rule model which allows for two inflation policy regimes: a low and high, this paper provides clear cut evidence that eurozone monetary authorities follow an asymmetric policy concerning more about inflation rather than real output. This asymmetric policy can be attributed to the attitude of the eurozone monetary authorities to build up credibility on stabilizing inflationary expectations. To evaluate the economic implications of the above monetary policy rule behavior, the paper simulates a small New Keynesian model. This exercise clearly indicates that the absence of reaction of the eurozone monetary authorities to negative output deviations when inflation is very low reduces their efficiency on dampening the effects of negative demand shocks on the economy.

In this paper, we criticize the use of the standard New Keynesian model in analyzing the Moroccan economy. By showing that, in addition to the well-known structural short comings of the model, it also fails to replicate the characteristics of the interest rate observed in data in the case of the Moroccan economy. In order to improve the performance of the model in replicating the characteristics of the interest rate, we moved from the standard model and we estimated two other variants. We found that the Taylor rule, as it stands in the standard model, doesn't capture, wholly, the way that the monetary policy is conducted in Morocco. And a version of the Taylor rule that reacts also to the deviations of inflation and output from their values lagged by one period, improve the fit between the model and the data.

The scientific literature that studies the economic cycles contains a historical debate between random and deterministic models. On the one hand, models with explanatory variables that follow a stochastic trajectory and produce, through transmission mechanisms, the observed cycles. Its rationale: the so-called Slutsky-Yule effect. In addition, models in which the system state at time t fixes, ceteris paribus condition applying, the state at time t + 1. The cycle would be the product of variables, making it possible to predict and enabling economic policies to combat recessions. The thesis of this paper is as follows. The application of the theorems of Chaitin of undecidability shows that it is not possible to conclude that debate. It is impossible to determine with absolute certainty whether the observed cycles follow a deterministic or stochastic model. To reach this result, I outline the fundamental theories of the business cycle, providing a classification and examples of mathematical models. I review the definition of randomness, and I consider the demonstration of Chaitin about the impossibility of deciding whether a data set is stochastic or not. A consequence, he says, of Gödel incompleteness theorems. I conclude that to consider a series of economic data, aggregated or not, as random or deterministic, depends on the theory. This applies to all cyclical phenomena of any kind. Specific mathematical models have observable consequences. But probabilism and determinism are only heuristic programs that guide the advancement of knowledge.

The scientific literature that studies the economic cycles contains a historical debate between random and deterministic models. On the one hand, models with explanatory variables that follow a stochastic trajectory and produce, through transmission mechanisms, the observed cycles. Its rationale: the so-called Slutsky-Yule effect. In addition, models in which the system state at time t fixes, ceteris paribus condition applying, the state at time t + 1. The cycle would be the product of variables, making it possible to predict and enabling economic policies to combat recessions. The thesis of this paper is as follows. The application of the theorems of Chaitin of undecidability shows that it is not possible to conclude that debate. It is impossible to determine with absolute certainty whether the observed cycles follow a deterministic or stochastic model. To reach this result, I outline the fundamental theories of the business cycle, providing a classification and examples of mathematical models. I review the definition of randomness, and I consider the demonstration of Chaitin about the impossibility of deciding whether a data set is stochastic or not. A consequence, he says, of Gödel incompleteness theorems. I conclude that to consider a series of economic data, aggregated or not, as random or deterministic, depends on the theory. This applies to all cyclical phenomena of any kind. Specific mathematical models have observable consequences. But probabilism and determinism are only heuristic programs that guide the advancement of knowledge.

In this paper, we navigate the uncharted waters of the inflation targeting (IT) policy effectiveness in 19 middle-income nations (MINs), that have been implementing inflation targeting policies, to boost their output. The prerequisite for stable and high growth is to ensure prices do not become too volatile over the long term. Therefore, the central bank conducts specific policies to support the desired condition i.e. stable prices. We investigate whether IT policy has a forward-looking effect on improving income in 19 MINs. Our main contribution is by showing examination of IT policy as monetary instruments in supporting stable and high growth in MINs. Thus, we assess whether the IT policy played a significant role in inducing GDP per capita improvement in a forward-looking analysis. We emphasize on estimating the selection of unconstrained variables by utilizing the Bayesian framework. To the best of our knowledge, our approach is the pioneer of examining the forwardlooking effect of IT on MINs who implemented the IT policy. We find that the IT policy has no prominent role in improving the GDP per capita of the 19 MINs. These results are further confirmed by performing robustness checks with different prior specifications.

This paper studies the factors accounting for the large, coincident increases in international borrowing and lending and international trade from 1970 to the present. We focus on the rise in annual changes in borrowing and lending across countries as summarized by the rise in the dispersion of the trade balance as a share of GDP. We show that these two salient features a rise in net and gross international trade are largely a consequence of a reduction in intratemporal trade barriers rather than a substantial reduction in the frictions on intertemporal trade or greater asymmetries in business cycles. Beyond explaining changes in the distribution of gross and net trade, the fall in frictions on intratemporal trade are consistent with the reduction in dispersion in other key macro time series such as the real exchange rate, terms of trade, and export-import ratio. JEL Classifications: F12, F13, F14

Economic growth is the most common goal in any economy, and capital is one of the most important determinants of growth. In the last few decades, the use of securities in various countries' capital markets has expanded and has become an essential part of the economic system supplying the capital need for investors and other institutions. This study aims to analyze the effect of securities used to finance banks (securitization) on economic growth. For this purpose, the theoretical analysis method is used in the framework of a Dynamic Stochastic General Equilibrium (DSGE) model. The theoretical model used is based on Frank Ramsey's (1928) economic growth model. To transform this model into a suitable model for research, the shadow banking system and securitization have been added. The model is then simulated using the calibration method and using the real data of the US economy; then, the macroeconomic changes and fluctuations created by bank securities are explained and analyzed. According to the research findings, issuing securities by banks will lead to slower economic growth. Therefore, it is recommended to avoid the use of securitization in banking.

Tato prace analyzuje chovani ceske ekonomiky v době dramatických ekonomických udalosti, ktere zapocaly v roce 2008. Analýza je provedena za využiti dynamickeho stochastickeho modelu vseobecne rovnovahy (DSGE). Model je identifikovan na realných historických datech. Analýza chovani modelu je provedena použitim metod rekurzivni estimace parametrů, impulznich odezev a sokove dekompozice. Model je posleze využit k vytvořeni podminěných předpovědi dalsiho vývoje ceske ekonomiky.

The authors estimate a small monthly macroeconometric model (BEAM, for bonds, equity, and money) of the Canadian economy built around three cointegrating relationships linking financial and real variables over the 1975-2002 period. One of the cointegrating relationships allows the identification of a supply shock as the only shock that permanently affects the stock market, and a demand shock that leads to important transitory stock market overvaluation. The authors propose a monetary policy reaction function in which the impact of a permanent inflation shock on the overnight rate is simulated and the future path of the overnight rate adjusted accordingly, to prevent any forecast persistent deviation from the inflation target. They introduce a technical innovation by showing under which conditions permanent shocks can be identified in a vector error-correction model with exogenous variables.

In this paper, I examine the role of monetary policy in a heterogeneous expectations environment. I use a New Keynesian business cycle model as the experiment laboratory. I assume that the central bank and private economic agents (households and producing firms) have imperfect and heterogeneous information about the economy, and as a consequence, they disagree in their views on its future development. I facilitate the heterogeneous environment by assuming that all agents are adaptively learning. Measured by the central bank's expected loss, the two major findings are: (i) policy that is efficient under homogeneous expectations is not efficient under the heterogeneous expectations; (ii) in the short and medium run, policy that is too responsive to inflation increases inflation and output volatility, but in the long run inflation responsive policy improves economic volatility. * The views expressed in this paper are those of the author(s) and do not necessarily reflect those of the Reserve Bank of New Zealand. Earlier versions of this paper have been circulating as the CERGE-EI working paper No. 277, and Czech National Bank working paper No. 5/2006. I would like to thank Michal Kejak, Kristoffer Nimark, Peter Sinclair, Sergey Slobodyan, participants at CERGE-EI seminars, Czech National Bank seminars, CFS Summer School 2005, a Bank of Poland conference on "Inflation expectations and monetary policy", and ESEM 2006, for their helpful comments. I am also indebted to Peter Sinclair for outstanding editing support. All errors are my own.

We build a DSGE model to study the asymmetries of FDI shocks in an economy like Colombia. Besides nominal wage and price rigidities, we use the fact that Colombia has two productive and differentiated regions, Bogota that produces more than 25% of Colombia GDP (DANE, 2016) and the rest of the country, Ricardian and non-Ricardian agents, habit formation, capital adjustment costs, and modeled an entire foreign sector. Empirical results show that even when in the long run results are not very different in terms of real output, the short run effects are asymmetric implying that a shock to FDI in the rest of the country might cause important microeconomic adjustments that could improve the distribution of income throughout the country.

Customer satisfaction occurs when customers' expectations are met. This study examined the factors that are critical in improving customer satisfaction in rural banks in Ghana. Two random sampling techniques were used to select 300 respondents from four out of ten branches of Bosomtwe Rural Bank Limited in the Ashanti Region of Ghana and structured questionnaire was administered to collect data. Descriptive statistics and probit model were employed in the data analysis. The results showed that there was active youth involvement in the activities of Bosomtwe Rural Bank Limited, all customers were literate and most of the patrons of the bank were males. In general, customers were satisfied with the services provided by the bank. The results of the probit regression analysis indicated that customer satisfaction depends on attention to customer complaints by the staff of the bank, accessibility of the bank to customers, tidiness and cleanliness of banking environment, speed of service delivery and knowledge base of the staff of the bank. These factors were found to have positive effects on customer satisfaction.

BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org).

This paper studies a multi-country currency union of small open economies. Demand-side disturbances hamper monetary union stabilisation unless participating countries’ business cycles are perfectly synchronised. In the face of country-specific supply shocks, a currency union of small open economies underperforms monetary autonomy. Higher preference for price stability also deteriorates monetary union stabilisation performance. Monetary-fiscal interaction leads to a free rider problem, with supply shocks eliciting higher interest rate variability. Wage bargaining attempting at stabilising real wages and output mitigates the free rider problem. Decentralised wage bargaining and a lower wage sensitivity of output favour a currency union over monetary autonomy.

We report transparency scores and growth indicators for the euro area and various classes of potential euro area candidates. We then study currency union stabilization when monetary policy transparency may be imperfect and supply conditions may be country-specific. Sectoral productivity shocks are found to reduce the effectiveness of the single monetary policy compared to monetary autonomy. For a small open economy, a wider crosscountry gap in supply slopes (as induced by larger trade openness differentials) favors currency union participation. Small size hampers monetary union stabilization under supply shocks, but not when output target shocks are misperceived by the public.

decena de variables a lo largo del ciclo económico para distintas ciudades y grupos demográficos. Las fechas utilizadas para identificar las fases de recesión fueron tomadas de Alfonso et al. (2013). Se encuentra que la participación laboral aumenta en las contracciones mientras que la tasa de ocupación cae. La suma de estos dos hechos permite predecir sin ambigüedades que en las recesiones el desempleo aumenta. En particular, los cesantes, más que los aspirantes, siempre aumentan en los momentos de crisis; es decir, los despidos y la reinserción al mercado parecen ser los eventos más regulares durante los períodos de crisis. Los salarios y las horas trabajadas caen en las recesiones mientras que el subempleo por horas aumenta. La relación de asalariados a población en edad de trabajar se constituye en una variable clave para el estudio de las fases del ciclo ya que siempre se contrae durante las recesiones. Palabras clave: ciclos económicos, tasa de participación, tasa de ocupación, tasa de desempleo, salarios. Clasificación JEL: J0, E3.  Las opiniones expresadas en este documento son responsabilidad exclusiva de los autores y no comprometen ni al Banco de la República ni a su Junta Directiva. Los errores son también su responsabilidad exclusiva.

After the financial crisis of 2008, many economists expressed dissatisfaction with the state of macroeconomics. They criticised deficiencies in the dominant dynamic stochastic general equilibrium modelling approach and conceptions of good macroeconomic research behind that dominance. This paper argues that there is a deeper problem in macroeconomics, which remains unaddressed. I connect existing literature critical of the institutions of macroeconomics and of economics in general to the institutional preconditions of effective criticism outlined by the philosopher Helen Longino. I find that as an epistemic community, macroeconomics does not function in a way that adequately supports critical evaluation of established beliefs, norms and practices. This failure may partly explain why many views on macroeconomic modelling, the tenability of which economists questioned after the crisis, were able to persist for so long. My analysis gives additional support to several recent proposals for institutional reforms in economics.

The objective of this paper is to evaluate the impact of fiscal instruments for Colombia on two of the country’s main issues: income inequality and informality, phenomena that have been exacerbated by the pandemic. For this purpose, we built a DSGE model whose main differentiating element is the level of liquidity of households. The model carried out various simulations of transfers to households, and we examined the effects of these on different macroeconomic variables. We conclude that for the economy to return to the same fiscal adjustment it had before a transfer, the government will somehow have to increase the productivity of the formal sector, as this increase will have a positive effect on growth, increase income taxes and employment, and decrease informality.

This paper attempts to assess the impact of public investment within the framework of a simple DSGE model calibrated on Russian data. To this end, three versions of the DSGE model were constructed. The first model, referred to as the baseline model, assumes efficient allocation of public investment. The second model considers inefficient use of public investment when it is not fully converted into capital. The third model examines crowding out of private investment by public investment. The primary focus of
this paper is to analyze the effects of public investment shock on various components of the economy. Two distinct effects are identified with regard to investment. The first effect relates to a short-term increase in demand due to an increase in investment activity. The size of this effect is strongly influenced by the crowding-out phenomenon, in particular by the ability of the economy to absorb investment effectively. The second effect is a reduction in marginal costs in the medium to long run, which facilitates economic growth even at the expense of increased private investment. This effect depends primarily on the efficiency of transformation of public investment into capital. The study also analyzes the sensitivity of the results to parameterization, including the degree of economic openness. The findings of the study explain the transmission mechanism of public investment,
including the factors affecting its efficiency. It is important to note that the main objective of the study was to investigate the transmission mechanism and its determinants, while the next stage of the research is expected to include a comprehensive assessment of the parameters using Russian data.

Although policymakers and practitioners are particularly interested in dynamic stochastic general equilibrium (DSGE) models, these are typically too stylized to be applied directly to the data and often yield weak prediction results. Very recently, hybrid DSGE models have become popular for dealing with some of the model misspecifications. Major advances in estimation methodology could allow these models to outperform well-known time series models and effectively deal with more complex real-world problems as richer sources of data become available. In this study we introduce a Bayesian approach to estimate a novel factor augmented DSGE model that extends the model of Consolo et al. [Consolo, A., Favero, C.A., and Paccagnini, A., 2009. On the Statistical Identification of DSGE Models. Journal of Econometrics, 150, 99–115]. We perform a comparative predictive evaluation of point and density forecasts for many different specifications of estimated DSGE models and various classes of VAR...

This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the Euro area. The model takes into account distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees and transfers to households. A newly computed quarterly data set of fiscal variables is used. Our results point to the prevalence of mild Keynesian effects of public expenditures. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensations for public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. The effects are more significant on the revenue side: decreases in labor income and consumption tax rates have sizeable effects on consumption and output, while a reduction in capital income tax favors investment and output in the medium run. Finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables. JEL: E32, E62.

WP/22/118 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

We augment an otherwise standard business cycle model with a richer government sector, and add monopolistic competition in the product market, and rigid prices, as well as rigid wages a la Calvo (1983) in the labor market. This specification with the nominal wage rigidity, when calibrated to Bulgarian data after the introduction of the currency board (1999-2016), allows the framework to reproduce better observed variability and correlations among model variables, and those characterizing the labor market in particular. As nominal wage frictions are incorporated, the variables become more persistent, especially output, capital stock, investment and consumption, which helps the model match data better.

In this paper, we compare the performance of different models, on two data frequencies, in terms of matching the business cycle moments of Pakistani economy. Out of the four models, two are simple real business cycle models for Pakistan introduced in Choudhary and Pasha (2013), and the other two are benchmark models [Aguiar and Gopinath (2007) and Garcia-Cicco et al. (2010)] from the literature for explaining the business cycles in emerging and developing economies. This paper calibrate these models for Pakistan and evaluate their performance in terms of matching second order moments from the actual data at both annual and quarterly frequency. We find that even though no single model is able to match all the relevant moments for all the important macroeconomic variables at both frequencies, the augmented RBC model with FDI shock (Choudhary and Pasha, 2013) performs relatively better.

We derive a new Keynesian IS curve that is augmented to capture the direct effects of the labour share on output. Our derivation shows that the direct effect of the labour share on output is ambiguous. Furthermore, theory suggests that the expected labour share negatively affects output. Empirically, we find that the labour share plays a significant role in driving output dynamics. However contrary to theoretical expectation, the expected labour share positively affects output in some cases, a finding we call the 'labour share puzzle'. We also find that over time, there seems to be a general shift in aggregate demand dynamics towards being profit-led, i.e. rising labour share decreases output. We conclude that policymakers should not ignore the labour share in their decisions.

This thesis, through a shadow rate augmented Structurar VAR model and a DSGE model with financial frictions and large scale asset purchases by the Central Bank, aims to examine the effects of unconventional monetary policy at the zero lower bound and the general dynamics of different policies. The main results suggest that unconventional monetary policy can be as stimulative as conventional monetary policy, although conventional monetary policy results are more persistent. At the ZLB, unconventional monetary policy has a more significant effect on output and inflation than conventional one. Furthermore, fiscal expenditures can
also have significant stimulative effects and at the ZLB they can have as stimulative effects as
asset purchases.

This paper concerns with the effect of exchange rate on gross domestic product (GDP) in the five founding member countries of the Association of Southeast Asian Nations (ASEAN-5) namely, Indonesia, Malaysia, Thailand, Singapore and Philippines. From theoretical perspective, exchange rate depreciation is a sign of economic failure in developing countries. However national economic perspective shows its merit in the increasing size of output. In this paper analysis, a set of panel data is used in which the time period was from 1980 to 2014 for the exchange rate variable of each member country. For the variable of GDP, the time period was from 1981 to 2015. In the pooled ordinary least squares (OLS) estimation, the real exchange rate coefficient had a statistically significant effect on the GDP level in the five member countries. The results showed that exchange rate depreciation would cause an increase in the countries' level of GDP. The implication from this research is that exchange rate depreciation stimulates the countries to increase their output. Increase in output would fulfil the demands of local and foreign markets. The countries' exported goods are expected to increase because they are considered cheap by their developed trading partners.

Persistent shifts in equilibria are likely to arise in oligopolistic markets and may be detrimental to the measurement of conduct, related markups and intensity of competition. We develop a cointegrated VAR (vector autoregression) based approach to detect long-run changes in conduct when data are difference stationary. Importantly, we separate the components in markups which are exclusively related to long-run changes in conduct from those explained solely by fundamentals. Our approach does not require estimation of markups and conduct directly, thereby avoiding complex problems in existing methodologies related to multiple and changing equilibria. Results from applying the model to US and five major European banking sectors indicate substantially different behavior of conventional raw markups and conduct-induced markups.

EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model that allows us to explain these patterns in the data, we discuss implications for banking union. Our res...

We study channels of risk sharing in the EMU before and after 2008, when the Great Recession started. Empirically, higher cross-border equity holdings and more direct bank-to-nonbank lending are associated with more risk sharing while interbank integration is not. Equity market integration in the EMU remains limited while banking integration is dominated by interbank integration. Further, interbank integration proved to be highly procyclical, which contributed to a freeze in risk sharing after 2008. Based on this evidence, and results from simulations of a stylized DSGE model, we discuss implications for banking union. Our results show that direct banking integration and capital market integration are complements and that robust risk sharing in the EMU requires integration on both fronts. * This paper has been been prepared for the IMFER-Central Bank of Ireland conference "The Euro at 20" and the IMF Economic Review. We could like to thank the editors Sebnem Kalemli-Ozcan, Philippe Martin, and Linda Tesar and our discussants Marcel Fratzscher and Rosen Valchev as well as two anonymous referees for many useful suggestions and comments. We are also grateful to conference and seminar participants in Dublin, at the Bank of Finland, the University of Zurich, and the ASSA meetings 2019 for comments.

Purpose: The general purpose of this research was to examine the impact of banking regulation on risk sharing and welfare in an Overlapping Generations model economy. Design/Methodology/Approach: The study uses a stochastic Overlapping Generation model with banking, limited liability, and deposit insurance, examining how the banking regulation affects welfare with the introduction of the principle of risk sharing in the economy. Findings: The results indicated support on previous studies and demonstrated that, using data from Turkey, banking regulation may lead to a welfare loss, a positive effect of optimal regulation on social welfare. Practical implications: The main results show that the trade-off between risk sharing, and financial stabilization depends on the level of capital requirements, and the risk sharing behavior of the economy. The risk sharing model for both specifications (risky and safe) confirm that the introduction of behavior of risk sharing on the economy has a positive impact on the welfare. Originality/value: This model allows us to evaluate quantitatively the key trade-off of risk sharing banking regulation and social welfare.

The OECD Economic Policy Paper Series is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.