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Macro-Financial Modelling of the Singapore Economy: a GVAR Approach

Alessandro Galesi, Filippo di Mauro
Monetary Authority of Singapore Macroeconomic Review, October 2017
Abstract
Globalisation has greatly increased the degree of interdependence across countries. Macroeconomic policy must therefore take a global perspective, particularly in the case of small open economies such as Singapore. From a modeller’s point of view, this requires considering many countries, regions and markets, as well as multiple channels of transmission, including trade and financial linkages. Cross-country interdependencies are increasingly reflected in the effects of global shocks, to oil or food prices for example, as well as technology and policy uncertainty spillovers.
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EFN Report Summer 2017: Economic Outlook for the Euro Area in 2017 and 2018

EFN Reports, No. 3, 2017
Abstract
• Worldwide economic activity is vivid in summer 2017. Data on production for the first quarter of the year were only mixed: in the euro area quarterly growth was accelerating, but it went down in the US, Japan, and China. Other basic indicators, however, suggest that these economies continue expanding healthily. • Risks concerning the international economic policy framework remain, in particular since the economic agenda of the US government is still unclear, and no one knows whether the Brexit negotiations will lead the way to an orderly separation of Britain from the EU. • Production in the euro area has been expanding by more that 1 ½ % per year for almost three years now; since summer 2016, this expansion has even gained a bit of pace, mainly due to a expansion in France and, to a lesser extent, in Italy. • The ECB’s cautious hints at a coming normalization of monetary policy were enough to have a discernible effect on financial conditions at the end of June: yields for long term bonds rose, and the euro appreciated. That said, the common currency is still relatively cheap, and borrowing costs for non-financial firms and private households are still low. • Overall, we raise our GDP forecast for 2017 from 1.7% (spring report) to 2.1% and for 2018 to 1.8% (spring: 1.7%). We expect HICP inflation to remain well below the ECB target both in 2017 and 2018. • A major risk for the continuation of the current upswing in 2018 comes from the normalization of monetary policy: it is not clear by how much long term interests will rise and whether higher borrowing costs will jeopardize the confidence of financial markets in the solvency of some public debtors in the euro area.
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EFN Report Spring 2017: Economic Outlook for the Euro Area in 2017 and 2018

EFN Reports, No. 2, 2017
Abstract
Global economic activity appears to be expanding rapidly during spring 2017. Confidence among managers is either strong or has improved in all major regions, and world trade and industrial production have, after two years of weakness, picked up markedly during last winter. For 2 ½ years, the euro area economy has now been constantly expanding at an annual rate of about 1.6%, slightly above potential. Employment has also been expanding steadily. Production and employment have been recently rising almost everywhere, including countries such as France and Italy where unemployment rates still do not appear to be on a downward trend. Official investment data for 2015 and 2016 appear to be distorted: big multinational firms relocated parts of their assets (intellectual property products in particular) or their registered business offices from countries outside the euro area to Ireland. As a consequence, reported gross fixed capital formation in Ireland expanded by 33% in 2015 and by 45% in 2016. Without this effect, investment growth in the euro area is about one percentage point lower in 2015 and 2016. Headline inflation hit 2% in February, but this was only the effect of higher world oil prices. The core rate is stubbornly at slightly below 1%, and wages rise annually by scarcely 1.5%. The revival of the economy will have to continue for considerably more time until inflation will come close to the ECB target zone. As monetary conditions continue to support growth, financial policies will be slightly expansive, and a certain external stimulus should come from the apparent recovery of world trade. Overall, we forecast euro area GDP to expand by 1.7% in both 2017 and 2018. However, policy uncertainty is substantial and could have a negative effect. In particular, elections in member states might give power to movements that aim at disintegrating Europe. Such a turn could rapidly undermine confidence, in particular in the financial strength of highly indebted member states.
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12.04.2017 • 19/2017

Joint Economic Forecast Spring 2017: Upturn in Germany strengthens in spite of global economic risks

The German economy is already in the fifth year of a moderate upturn. According to the Gemeinschaftsdiagnose (GD, joint economic forecast) that was prepared by Germany’s five leading economic research institutes on behalf of the Federal Government, capacity utilization is gradually increasing, and aggregate production capacities are now likely to have slightly exceeded their normal utilisation levels. However, cyclical dynamics remain low compared to earlier periods of recoveries, as consumption expenditures, which do not exhibit strong fluctuations, have been the main driving force so far. In addition, net migration increases potential output, counteracting a stronger capacity tightening. “Gross domestic product (GDP) is expected to expand by 1.5% (1.8% adjusted for calendar effects) and 1.8% in the next year. Unemployment is expected to fall to 6.1% in 2016, to 5.7% in 2017 and 5.4% in 2018”, says Oliver Holtemöller, Head of the Department Macroeconomics and vice president of the Halle Institute for Economic Research (IWH) – Member of the Leibniz Association. Inflation is expected to increase markedly over the forecast horizon. After an increase in consumer prices of only 0.5% in 2016, the inflation rate is expected to rise to 1.8% in 2017 and 1.7% in 2018. The public budget surplus will reduce only modestly. Public finances are slightly stimulating economic activity in the current year and are cyclically neutral in the year ahead.

Oliver Holtemöller
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14.12.2016 • 50/2016

The German Economy: Economic Activity Spurred by Private Consumption and Construction

German economic activity remains robust due to strong domestic demand. IWH forecasts gross domestic product (GDP) to increase by 1.3% in 2017. The growth rate is half a percentage point lower than in 2016 due to calendar effects and a negative contribution of external trade. Consumer price inflation also remains modest (1.3%). “Unemployment is expected to increase slightly due to a protracted integration of refugees into the labor market”, says Oliver Holtemöller, Head of the Department Macroeconomics and IWH vice president

Oliver Holtemöller
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The Macroeconomic Risks of Undesirably Low Inflation

Jonas Arias, Christopher J. Erceg, Mathias Trabandt
European Economic Review, 2016
Abstract
This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
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EFN Report Autumn 2016: Economic Outlook for the Euro Area in 2017 and 2017

EFN Reports, No. 4, 2016
Abstract
During the first half of 2016, investment activity of private firms was weak in most advanced economies and labour producitivity was even decreasing, as was world trade in goods. Consumption of private households, however, kept the world economy afloat. Within this global context, the modest recovery of the euro area economy continues, with important tailwinds from labour markets. Employment ist expanding everywhre, even in those countries, such as France and Italy, where unemployment rates have still not come down significantly. Since monetary and fisical policies will not become more expansive in 2017, the stimulus from cheap oil is fading, and exports to the UK will be dragged down by the fallout of the Brexit votem there is reason to expect the euro area recovery to lose some momentum. GDP will, according to our forecast, increase by 1,6% in this year and by 1,5% in 2017, about as much as potential output in the euro area. Our inflation forecast for 2016 is 0,2%. For 2017, we expect inflation to increase up to 1,2%, as during next year the favourable effects of decreasing energy prices will fade off.
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To Invest or Not to Invest, That Is the Question: Analysis of Firm Behavior under Anticipated Shocks

Dejan Kovač, Nikola Kleut, Boris Podobnik, Vuk Vukovic
Plos One, No. 8, 2016
Abstract
When companies are faced with an upcoming and expected economic shock some of them tend to react better than others. They adapt by initiating investments thus successfully weathering the storm, while others, even though they possess the same information set, fail to adopt the same business strategy and eventually succumb to the crisis. We use a unique setting of the recent financial crisis in Croatia as an exogenous shock that hit the country with a time lag, allowing the domestic firms to adapt. We perform a survival analysis on the entire population of 144,000 firms in Croatia during the period from 2003 to 2015, and test whether investment prior to the anticipated shock makes firms more likely to survive the recession. We find that small and micro firms, which decided to invest, had between 60 and 70% higher survival rates than similar firms that chose not to invest. This claim is supported by both non-parametric and parametric tests in the survival analysis. From a normative perspective this finding could be important in mitigating the negative effects on aggregate demand during strong recessionary periods.
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Unemployment and Business Cycles

Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt
Econometrica, No. 4, 2016
Abstract
We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy, and the duration of an increase in unemployment benefits.
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Macroeconomic Trade Effects of Vehicle Currencies: Evidence from 19th Century China

Makram El-Shagi, Lin Zhang
IWH Discussion Papers, No. 23, 2016
published in: China Economic Journal
Abstract
We use the Chinese experience between 1867 and 1910 to illustrate how the volatility of vehicle currencies affects trade. Today’s widespread vehicle currency is the dollar. However, the macroeconomic effects of this use of the dollar have rarely been addressed. This is partly due to identification problems caused by its international importance. China had adopted a system, where silver was used almost exclusively for trade, similar to a vehicle currency. While being important for China, the global role of silver was marginal, alleviating said identification problems. We develop a bias corrected structural VAR showing that silver price fluctuations significantly affected trade.
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