HenU/INFER Workshop on Applied Macroeconomics 5.5

The China Shock, Market Concentration and the U.S. Phillips Curve

Melih Firat (John Hopkins University)

This paper analyzes the effects of the China shock and market concentration on the US Phillips curve at the industry level. Empirical results show that higher import penetration from China increases the disconnect between inflation and the output gap across industries, and sectoral linkages through downstream effects amplify this effect. Exploiting the rich industry level heterogeneity in market concentration, I also show that a rise in market concentration results in a decline in the Phillips curve coefficient. Furthermore, I build a two-country multi-sector model with input-output networks and firm heterogeneity. This framework supports the empirical results by showing that sectors with a higher share of foreign firms or a higher market concentration have a flatter Phillips curve.

Global risk and the dollar

Georgios Georgiadis (European Central Bank) / Gernot J. Müller (University of Tübingen and CEPR) / Ben Schumann (Free University of Berlin)

Global risk shocks appreciate the US dollar as well as other safe-haven currencies and induce an economic contraction, synchronized across the US and the rest of the world. We establish these results in an estimated Bayesian proxy SVAR model and construct counterfactuals to shed light on the role of the dollar for the transmission of global risk. They show that the appreciation of the dollar has little bearing on US trade flows; instead it induces a sharp contraction of cross-border credit. As a result, the dollar appreciation amplifies the contractionary effects of global risk shocks in the rest of the world.

The Effects of Oil Price Uncertainty on China’s Economy

Bin Wang (Jinan University) / Buben Fu (Shanghai University of Finance and Economics) / Qinhua Xu (Renmin University of China)

Nominal interest rates in China have long been controlled by the government, making their changes lagging behind price changes. We model this in a New Keynesian model with a transiently fixed interest rate and prove that interest rate fixation can magnify model volatility and lead to economic instability. Specifically, when the fixed level is different from steady state, the model enters a vicious spiral until monetary policy switches to a flexible interest rate rule, which represents the shadow rate of the economy, determined by administrative policy tools in addition to discrete (and insufficient) interest rate adjustments. This explains China’s large business cycle fluctuations over the past decades.

Optimal Monetary Policy Mix at the Zero Lower Bound

Dario Bonciani (Bank of England) / Joonseok Oh (Free University of Berlin)

When a central bank carries out long-term asset purchases to affect their price, they increase the volatility of consumption of households holding long-term debt. As a result, the monetary policy authority faces a novel trade-off between inflation, output gap, and balance-sheet volatility. In response to negative demand shocks at the ZLB, the optimal monetary policy consists of a combination of a low-for-long policy (Forward Guidance) and balance sheet policies. Specifically, forward guidance boosts expectations about inflation and the output gap, an initial increase in the size of the balance sheet (Quantitative Easing) further eases the initial drop in demand, and a subsequent contraction (Quantitative Tightening) mitigates the overshoots in prices and real activity. Last, if the central bank only aims to stabilise inflation and the output gap, balance sheet policies improve welfare if the relative weight on the output gap is large.

Are Government Spending Shocks Inflationary at the Zero Lower Bound? New Evidence from Daily Data

Songyup Choi (Yonsei University) / Junhyeok Shin (Johns Hopkins University) / Seung Yong Yoo (Yonsei University)

Are government spending shocks inflationary at the zero-lower-bound (ZLB)? Despite its importance in amplifying a government spending multiplier, empirical evidence to date has not provided a clear answer to this question. Exploiting newly-constructed high-frequency data on both government spending and the price index of the U.S. economy, we address a challenge in identifying government spending shocks with standard timing restrictions when using low-frequency data. Applying local projections to the daily data, we find that prices decline persistently in response to a positive government spending shock at the ZLB. Our finding is hard to reconcile with standard New Keynesian models, which typically generate an increase in inflation following fiscal expansion. Instead, our finding indicates that the binding ZLB is unlikely to produce a larger fiscal multiplier via the inflation channel.

Interest Rate Fixation and Business Cycles in China: An Analysis Based on the New Keynesian Model

Bing Tong (Henan University) / Guan Yang (Nankai University)

Nominal interest rates in China have long been controlled by the government, making their changes lagging behind price changes. We model this in a New Keynesian model with a transiently fixed interest rate and prove that interest rate fixation can magnify model volatility and lead to economic instability. Specifically, when the fixed level is different from steady state, the model enters a vicious spiral until monetary policy switches to a flexible interest rate rule, which represents the shadow rate of the economy, determined by administrative policy tools in addition to discrete (and insufficient) interest rate adjustments. This explains China’s large business cycle fluctuations over the past decades.

Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates

Jianjun Miao / Dongling Su (Boston University)

We provide a dynamic new Keynesian model in which entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity service and raise net worth. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are less than economic growth and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits.

Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment?

Jane Binner (University of Birmingham) / Luis Molinas (Central Bank of Paraguay)

This paper contributes to the literature as the first work of its kind to examine the role and importance of Divisia monetary aggregates and concomitant user cost price indices as superior monetary policy forecasting tools in a negative interest rate environment. We compare the performance of Divisia monetary aggregates with traditional simple-sum aggregates in several theoretical models and in a Bayesian VAR to forecast the exchange rates between the euro, the dollar and yuan renminbi at various horizons using quarterly data. We evaluate their performance against that of a random-walk using two criteria: Root Mean Square Error ratios and the Diebold-Mariano statistic. We nd that, under a free floating exchange regime, superior Divisia monetary aggregates outperform their simple sum counterparts and the benchmark random walk in negative interest rate environment and non-negative interest rate environments consistently.

When monetary policy reverses: the case of interest-on-excess-reserves (IOER)

Irem Erten

In this paper, we investigate the response of global banks to the payment of interest-on-excess-reserves (IOER). We find that foreign bank affiliates receive less funding from their parent banks, and send more funds to their headquarters, when their home Central Bank remunerates excess reserves. We exploit different organizational forms and IOER eligibility for identification in the U.S. and find that the establishment of an excess deposit facility at the home country causes a 10- percentage point decline on the U.S. credit provided by foreign bank branches. We also control for demand-side factors in a loan-level data in which borrowers have multiple lending relationships. We find that within a banking organization, the credit supply response is stronger in branches that are smaller, have less profitable lending opportunities, and rely on parent bank financing. The results suggest that the type of monetary policy framework matters, and that safe asset, when remunerated, can crowd out lending to the real economy.

Hysteresis and Full Employment in a Small Open Economy

Timothy Watson (Australian National University) / Juha Tervala (University of Helsinki)

We simulate a small open economy Two Agent New Keynesian (TANK) model featuring `learning by doing' in production whereby changes in employment generate hysteresis in productivity and output. Credit constraints and hysteresis amplify the efficacy of fiscal stimulus in a small open economy with a floating exchange rate and inflation-targeting central bank such that output multipliers can exceed unity; welfare multipliers can be positive; and the degree of hysteresis, output and employment multipliers match empirical evidence well. Fiscal stimulus helps reverse output hysteresis, and price-level targeting provides superior macroeconomic stabilisation compared to other simple monetary rules combined with fiscal stimulus.

Natural Disasters and Financial Stress: Can Macroprudential Regulation Tame Green Swans?

Pauline Avril (University of Orleans - LEO) / Grégory Levieuge (Banque de France) / Camelia Turcu (University of Orleans - LEO)

We empirically investigate the impact of natural disasters on the external finance premium (EFP), conditional on the stringency of macroprudential regulation. The intensity of natural disasters is measured through an original set of geophysical indicators for a sample of 88 countries over the period 1996-2016. Using local projections, we show that, following storms, the EFP significantly drops (rises) when macroprudential regulation is stringent (lax). This suggests that regulated financial systems could foster favorable financing conditions to replace destroyed capital with more productive capital. Macroprudential stringency seems less crucial in the case of floods, the predictability of which may prompt self-discipline.

Money demand in China: A regional perspective

Kiril Tochkov (Texas Chrisitan University)

The literature on money demand in China has been growing in recent years but it focuses exclusively on the aggregate level. This paper estimates the money demand at the regional level in China, arguing that differences across provinces matter for monetary policy. For this purpose, we first construct monetary aggregates for a sample of provinces over the period 1992-2015 and compare these to the national index. Next, we estimate money demand functions for the set of provinces. The results confirm the existence of a long-term cointegration relationship between the demand for money and its determinants. However, significant regional heterogeneity is detected and its implications for monetary policy are discussed.

Feasibility of Renminbi Price Level Targeting: Better for China’s Housing Prices?

Wen-Chyng Lou (E.SUN Bank Hong Kong Branch) / Kuo-chun Yeh (National Taiwan University) / Ya-chi Lin (Feng-Chia University)

Following the 2008 financial crisis, many studies have considered new policy frameworks, including price level targeting, originally proposed by Fisher (1913). Taking China’s RMB reform as an example, we compare the various fictive price-stability RMB indexes with the imputed China Foreign Exchange Trade System indexes (CFETS) and find two things. First, the fictive price stability RMB indexes show lower volatility, implying China’s monetary policy does not seek price stability. Second, the correlation and regression analysis indicate monetary policy would not increase China’s housing prices if price level targeting is applied.

Nine blind men and the PBoC

Makram El-Shagi / Yishuo Ma (Henan University)

Over the past decade, several dozen papers have been written that identify the People's Bank of China's monetary policy shocks. Yet, what often seems like minor differences in measurements of monetary policy and identifying assumptions yield vastly different implied shocks. In this paper, we pitch 20 shock time series from the literature against each other in a horse race. We use a local projections framework to produce impulse responses based on all shocks for production, prices, money and interest rates and use them to assess the economic plausibility of the competing results. Our results confirm the frequently mentioned relevance of monetary aggregates for Chinese monetary policy but also point the importance of using forward looking policy reaction functions (or account for forward looking variables in a VAR framework) when identifying monetary policy shocks.

Sectoral Shocks, Production Linkages, and Business Cycles in China

Lunan Jiang (Henan University) / Young Sik Kim (Seoul National University) / Lin Zhang (Henan University)

This paper builds a dynamic multisector model using production linkages to investigate the macroeconomic dynamics of the Chinese economy. With structural parameters and sectoral shocks calibrated to 46 domestic sectors, the model simulation replicates a large fraction of the volatility and comovement of Chinese aggregate and sector dynamics. Further empirical analysis shows that idiosyncratic components dominate the sectoral productivity shocks during our sample period. Therefore, sector-specific shocks and production linkages are crucial to understanding Chinese business cycles. We also characterize the reactions of the Chinese economy to sectoral shocks at both aggregate and sector levels, which might provide useful guidance for future policy analysis.

Have monetary policy shocks influenced the health of European banks

Alexander Jung (European Central Bank)

Applying high-frequency identification and using a large dataset of European banks (IBSI dataset), this study examines the influence of monetary policy shocks on banks. Overall, we find that easing surprises or an (unexpected) term structure steepening contributed to the health of most European banks. In a low interest-rate environment, central bank information effects dampened the positive effect of pure easing shocks, while the monetary policy transmission through slope surprises remained intact. We demonstrate that Fed monetary policy shocks had significant effects on bank bond yields and stock prices of European banks but exerted no meaningful spillover on their credit risk. Bank-level evidence shows that bank and country effects, the loan regime, and banks’ maturity mismatch explain differences in the transmission of monetary policy shocks to banks.

Household Indebtedness and the Macroeconomic Effects of Tax Changes

Songyup Choi (Yonsei University) / Junhyeok Shin (Johns Hopkins University)

This study investigates whether household indebtedness influences the macroeconomic effects of the U.S. tax policy. We apply a state-dependent local projection method to the exogenous tax shock series by Romer and Romer (2010) and find that a tax cut strongly stimulates output when households are heavily indebted. The expansionary effect of a tax cut in the period of high household debt is particularly significant for (i) private consumption than investment; (ii) the case of a personal income tax than a corporate income tax; (iii) during bad times than good times. These findings support household indebtedness as a measure of liquidity constraints for wealthy hand-to-mouth households at the macro-level. In response to a tax cut, households increase (decrease) labor supply when they are indebted (not indebted). This lack of a neoclassical wealth effect further contributes to an increase in output. The household debt-dependent effects of tax policy are more notable than those of the government spending policy, lending further support to the role of the household liquidity constraint channel of tax policy.

Special Deals from Special Investors: The Rise of State-Connected Private Owners in China

Chong-En Bai (Tsinghua University) / Chang-Tai Hsieh (University of Chicago and NBER) / Zheng Song (Chinese University of Hong Kong) / Xin Wang (Chinese University of Hong Kong)

Abstract 

We use administrative registration records with information on the owners of all Chinese firms to document their connections through equity investments. We document a hierarchy of private owners: the largest private owners have direct equity investments from state-owned firms, the next largest private owners have equity investments from private owners that themselves have equity ties with state owners, and the smallest private owners do not have any ties with state owners. The network of “state-connected” private owners has expanded over the last two decades. The share of registered capital of private owners with state-connected investors increased by almost 20 percentage points between 2000 and 2019, driven by two trends. First, state owners have increased their investments in joint ventures with private owners. Second, private owners with equity ties to state owners also increasingly invest in joint ventures with other (smaller) private owners. The expansion in the number of state-connected private owners may have increased aggregate output of the private sector by 2.5% a year between 2000 and 2019.

Globalization and the Rise of Populist Radical Right in Europe

Makram El-Shagi (Henan University) / Steven J. Yamarik (California State University Long Beach)

This paper estimates the impact of globalization on the electoral outcomes of populist radical right (and lef) parties in Europe. We use import penetration, outbound foreign direct investment, immigration, and asylum seekers as globalization threats seen by voters. To control for endogeneity, we use the predicted values of the bilateral determinants of each globalization measure. We then estimate the effects of each indicator of globalization on the election results of populist radical right parties throughout Europe.

How Alliances Form and Conflict Ensues

Lu Dong (University of Nottingham) / Lingbo Huang (Nanjing Audit University) /Jaimie W. Lien (The Chinese University of Hong Kong (CUHK)) / Jie Zheng (Tsinghua University)

In a social network in which friendly and rival bilateral links can be formed, how do alliances between decision-makers form, and what determines whether a conflict will arise? We study a network formation game between ex-ante symmetric players in the laboratory to examine the dynamics of alliance formation and conflict evolution. A peaceful equilibrium yields the greatest social welfare, while a successful bullying attack transfers the victimized player’s resources evenly to the attackers at a cost. Consistently with the theoretical model predictions, peaceful and bullying outcomes are prevalent among the randomly re-matched experimental groups, based on the cost of attack. We further examine the dynamics leading to the final network and find that groups tend to coordinate quickly on a first target for attack, while the first attacker entails a non-negligible risk of successful counter-attack by initiating the coordination. These findings provide insights for understanding social dynamics in group coordination.

Does Informality Hinder Financial Development Convergence?

Can Sever (IMF) / Emekcan Yucel (Bogazici University)

This paper sheds light on the role of informal economy in financial development convergence. The evidence shows that credit levels tend to converge across countries over time,
particularly when informality is lower. As the size of informal economy becomes larger, however, financial development convergence weakens, and eventually can turn out to be divergence. This finding suggests that policies that address informality can help countries with lower levels of financial development catch up with the countries with more developed financial systems. It also has implications for the evolution of cross-country income gaps, considering the role of financial development in economic performance. In the last part of the paper, we find evidence consistent with this. Result shows that higher informality is also associated with weaker income convergence across countries over time.

Innovation beyond jurisdiction boundaries: Regional integration and spatial reshaping of innovation patterns

Siyu Wang (Shanghai University of International Business and Economics) / Peizhen Jin (East Normal University)

Eliminating the jurisdictional boundary effect of the flow of innovative elements is the key to achieve coordinated regional development. This paper set a theoretical model of the influence of regional integration policies on the spatial agglomeration of innovations. We utilize the data mining methodology, and finally obtain the patent distribution and patent transfer data in 283 cities in China. The empirical results based on the Spatial Difference-in-Difference (SDID) model show that overall regional integration policies have improved Chinese cities. However, the changes in the urban innovation structure of different geographic locations and economic development levels show a spatial differentiation trend. The regional integration policy has significantly promoted the diffusion of innovation portrayed by the patent transfer network, so that the spatial density of innovation in urban agglomerations in developed areas presents a “ripple effect” that spreads from urban centers to border areas and tends to be balanced. However, the policy show less significance in inland or underdeveloped urban agglomerations. The above conclusions are still robust after changing the estimation method, replacing the core variables and dealing with the endogeneity of the story. In sum, the construction of transportation infrastructure, the agglomeration of high-tech industries, and the cultivation of human capital in urban border areas are important mechanisms for regional integration policies to drive the balanced pattern of innovation space. The formulation of regional integration policies under the premise of considering the heterogeneity of cities is conducive to the establishment of local government coordination and benefit-sharing mechanisms, and is essential for realizing a coordinated regional development strategy driven by high-quality innovation.

The dynamic effects of macroeconomic announcements on the volatilities of Renminbi onshore and offshore exchange rates

Zhitao Lin / Tao Tang (Jinan University) 

We investigate the dynamic effects of Chinese and US macroeconomic announcements on the daily volatilities of Chinese RMB onshore (CNY) and offshore (CNH) exchange rates under the framework of a Markov switching VAR model with exogenous variables. We find the two-regime model is best fit for RMB volatilities and the estimated regime-switching date is around the exchange rate reform in August 2015. Empirical results show that both volatilities are affected by more kinds of Chinese and US announcements under the second regime. In the perspective of the average influence, we find a greater effect of US announcements in the CNY market; in contrast, Chinese announcements dominate in the CNH market from the perspective of average magnitude. The relative importance of US news weakening apparently in the second regime, leads to a growing role of Chinese news on RMB volatilities. Lastly, we show that the impact of positive local news is greater than that of negative news within China, whereas negative news released from the US are more associated with RMB volatilities.

Monetary Policy Surprises and Corporate Investment in China

Dong Lu / Huoqing Tang / Chengsi Zhang (Renmin University of China)

This study provides firm-level evidence on the heterogeneous, dynamic effect of monetary policy shocks on corporate investment in China. We first identify exogenous monetary policy surprises using financial market data around policy announcement as external instruments. We then use rich firm-level data to examine the monetary policy transmission mechanisms. We find that unexpected monetary policy easing boosts firms' aggregate real investment in China, with peaks in the second and fourth years. This empirical pattern is generated by the heterogeneous dynamic responses of firms with size-dependent financial constraints: small-sized firms have quicker and larger responses than large-sized firms. However, these results are due mainly to the reaction of non-state-owned firms, not state-owned enterprises. We further find that sales revenue response could be the channel through which monetary policy shock transmits to firms' real investment, and a simple heterogeneous firm model can simultaneously explain these empirical findings.

The role of SOE in the transmission of fiscal policy shocks in China

Makram El-Shagi / Lin Zhang (Henan University)

In this paper, we demonstrate the importance of state-owned companies for the conduct of fiscal policy in China using both a structural VAR based on macroeconomic data and a panel model utilizing firm-level data. We show that state-owned companies respond fundamentally differently to fiscal policy shocks than non-SOEs. Our results strongly indicate that SOEs are not merely competitive with the private sector, but rather that their resources are leveraged as part of fiscal policy to support and stabilize the private economy.

Central Bank Digital Currency: When Price and Bank Stability Collide

Linda Schilling (École Polytechnique, CREST, and CEPR), Jesús Fernández-Villaverde (University of Pennsylvania, NBER, and CEPR), Harald Uhlig (University of Chicago, CEPR, and NBER)

With the introduction of a central bank digital currency, or CBDC, a central bank is forced to confront a classic issue in banking: the tension between providing a liquid means of payment and the desirable level of maturity transformation. We analyze this issue in a nominal version of a Diamond and Dybvig (1983) model, where the central bank additionally has a price stability objective. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as an excessive real asset liquidation or as a failure to maintain price stability. Thus, we demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.

Stuck in the Wisdom of Crowds: Information, Knowledge, and Heuristics

Yunwen He (Tsinghua University) / Jaimie W. Lien (The Chinese University of Hong Kong (CUHK)) / Jie Zheng (Tsinghua University)

Collective knowledge is significantly affected by information about others’ viewpoints. However, under what conditions does the “wisdom of crowds” help versus harm knowledge of factual information? In this experiment, we present subjects with the task of answering 50 factual true or false trivia questions, with the potential opportunity to revise their answers after receiving different levels of information about other subjects’ answers and self-assessed confidence levels from an independent session. We find that information about others’ answers improves performance on easy questions, but tends to harm performance on difficult questions. In addition, information about answers provided by other subjects mainly improves performance for those with lower initial knowledge levels. Subjects in our Moderate-Information condition outperform those in either the Low or High-Information conditions, implying an optimal level of social information provision, in which the Majority Rule and Maximum Confidence rule complement one another. Although the Maximum Confidence rule can improve performance, yielding the lowest overall error rate out of the heuristics considered, subjects generally underutilize the information on other subjects’ confidence levels in favor of the Majority Rule heuristic. These findings shed light on possible directions for policies that can cultivate factual knowledge on online opinion platforms.

Financial Technologies and the Effectiveness of Monetary Policy Transmission

Iftekhar Hasan (Fordham University) / Boreum Kwak (IWH Halle) / Xiang Li (IWH Halle)

This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates monetary policy transmission to real GDP, consumer prices, bank loans, and housing prices. A subcategorical analysis shows that the muted transmission is the most pronounced in the adoption of FinTech payment and credit, compared to that of insurance. The regulatory arbitrage and competition between FinTech and banks are the possible mechanisms leading a mitigated monetary policy transmission.

Sharing Economy and Housing Markets

Jarko Fidrmuc / Philipp Reichle / Fabian Reck (Zeppelin University)

A heated debate has emerged drawing a connection between housing affordability and home-sharing platforms such as Airbnb. Despite first regulatory efforts by municipalities, the impact on rents and house prices has been examined insufficiently in scientific literature, especially with regards to Europe. Therefore, this paper addresses this gap by analyzing data on Airbnb listings for 25 European cities between 2010 and 2019. Using fixed effects and dynamic panel regressions, we show that home-sharing has significantly contributed to a rise in rents and house prices in European cities. While these effects are mainly concentrated in city centers, we also document smaller effects in other urban districts. Finally, the recent home-sharing regulations are not associated significantly with housing affordability.

Does targeted monetary policy affect the innovation of small and micro-enterprises? Evidence from China

Qi Liu / Bin Dong (Southeast University, Nanjing)

Recently, central banks around the world have experimented with targeted monetary policy to support certain sectors in the real economy. However, the effectiveness of targeted monetary policy in emerging markets, such as China, has been paid little attention. Targeted reserve requirement ratio cut (TRRRC) policy is a targeted monetary policy to promote the development of small and micro-enterprises (SMEs) in China. This paper uses Chinese NEEQ-Listed companies in 2007-2018 to explore the effect of the TRRRC policy on SMEs’ innovation in a difference-in-differences framework. The results show that: (1) The TRRRC policy significantly promotes SMEs’ innovation, and this relationship holds after a series of robustness tests; (2) Our findings are particularly pronounced in subsamples with non-SOEs, high-tech industries and superior local financial technology (fintech) development; (3) The mechanism test indicates that the financing constraints is an important channel that affects SMEs’ innovation. These results suggest that the targeted monetary policy can stimulate innovation in SMEs by exerting targeted credit supply, thus achieving transformation and upgrading of the economic structure in a transition economy.

Under the Same Roof? The Green Belt and Road Initiative and Firms’ Heterogeneous Responses

Mingming Jiang / Jianhong Qi / Zhitong Zhang (Shandong University)

The Belt and Road Initiative has been a core strategy of the Chinese government in recent years. It promotes economic growth and employment of the countries along the routes but causes environmental concerns at the same time. As an effort to balance the economic development and environmental harmony in these countries, China launched the Green Belt and Road policy in 2017. This paper, taking the implementation of this policy as a quasi-natural experiment, employs a difference-in-difference method to identify the policy impacts on the Chinese outward direct investment (ODI) firms. We find a significant and robust role of the green policy improving firms’ performance. Through the unique perspective of the green Belt and Road Initiative, we find that the seemingly similar impacts of the policy shock actually conceal distinct responses of state-owned and non-state-owned enterprises. This difference is deeply rooted in the character of the Chinese economy in the past and sheds light on the direction of future reforms.

Tariff Reduction, Productivity and Wages: the Firm-level Evidence from China

Qianqian Wang (Henan University)

This paper studies the effect of tariff reduction and productivity on wages. A detailed firm-level dataset has been constructed by combining the manufacturing, product-level transaction trade data, and industry-level tariff data from China. We use a unconditional quantile regression and Oaxaca-Blinder decomposition with RIF regressions to analyze the effects of input, ouput tariff reductions and total factor productivity (TFP) on wages. Results indicate that input tariff reduction would increase wages, but has a negative effect on wages at the 10th and 90th percentile with full removal of trading licenses since year 2005; the output tariff reduction has an opposite effect; the TFP increases wages, with the input tariff reduction, the effect of TFP would be stronger on the 90th percentile of wage distribution after year 2005, and with the output tariff reduction, the effect of TFP would be stronger on the 10th percentile. The results are robust under different examinations.

What goes around comes around: How large are spillbacks from US monetary policy?

Maximilian Breitenlechner (University of Innsbruck) / Georgios Georgiadis (European Central Bank) / Ben Schumann (Free University of Berlin)

We quantify spillbacks from US monetary policy based on structural scenario analysis and minimum relative entropy methods applied in a Bayesian proxy structural vector-autoregressive model estimated on data for the time period from 1990 to 2019. We find that spillbacks account for a non-trivial share of the overall slowdown in domestic real activity in response to a contractionary US monetary policy shock. Our analysis suggests that spillbacks materialise as Tobin's q/cash flow and stock market wealth effects impinge on US investment and consumption. In particular, contractionary US monetary policy depresses foreign sales of US firms, which reduces their valuations/cash flows and thereby induces cutbacks in investment. Similarly, as contractionary US monetary policy depresses US and foreign equity prices, the value of US households' portfolios is reduced, which triggers a drop in consumption. Net trade does not contribute to spillbacks because US monetary policy affects exports and imports similarly. Finally, spillbacks materialise through advanced rather than through emerging market economies, consistent with their relative importance in US firms' foreign demand and US foreign equity holdings.

Current Account Imbalance and Financial Accelerator Asymmetry-A Two-Country DSGE Model with Risk Shocks

Tao Jin (Tsinghua University) / Simon Kwok (The University of Sydney) / Xin Zheng (Tsinghua University)

We examine financial acceleration asymmetry between state-owned enterprises (SOEs) and privately-owned enterprises (POEs) in the Chinese economy. We construct and estimate a DSGE model, which accommodates SOEs and POEs, to capture asymmetric amplification and propagation of financial frictions upon SOEs and POEs. On one hand, economic frictions, which include imperfect competition, price stickiness, and investment adjustment cost, propagate through manufacturing production. On the other hand, financial frictions, which incorporate asymmetric information and costly monitoring, transfer via corporate finance. We gauge financial acceleration mechanisms of SOEs and POEs by measuring and comparing their respective macroeconomic responses towards shocks between two scenarios, namely, the existence and inexistence of monitoring cost. Our methodologies consist of Bayesian estimation, Bayesian model comparison, impulse response analysis, historical decomposition, forecast error variance decomposition, and counterfactual analysis. We find the extent of asymmetric financial acceleration, which originates from domestic and foreign financial frictions, hinges on both the size of monitoring cost and the magnitude of leverage ratio. Consequently, asymmetric financial acceleration exits between SOEs and POEs due to their differences in monitoring cost and leverage ratio.

How do credit supply and demand influence business cycle dynamics?

Christiane Baumeister (University of Notre Dame) / Gregor von Schweinitz (IWH Halle / Leipzig University)

This paper quantifies the relative importance of credit demand and credit supply shocks in determining fluctuations in credit variables and the business cycle. We extend Bayesian structural VARs with informative priors on structural coefficients to allow for the case of multiple external instruments. As a new instrument for credit demand, we construct a granular instrument based on regional mortgage origination. We find that credit demand is quite elastic with respect to contemporaneous macroeconomic conditions, while credit supply is relatively inelastic. Both shocks together account for around 50\% of the variation of output, inflation and risk-free interest rates. However, their relative importance varies over time: credit demand mostly drove the boom prior to financial crisis, while credit supply shocks were responsible during the crisis itself.

Heteroskedastic Proxy Vector Autoregressions

Helmut Lütkepohl (Freie Universität Berlin / DIW Berlin) / Thore Schlaak (DIW Berlin)

Abstract 

In proxy vector autoregressive models, the structural shocks of interest are identified by an instrument. Although heteroskedasticity is occasionally allowed for in inference, it is typically taken for granted that the impact effects of the structural shocks are time-invariant despite the change in their variances. We develop a test for this implicit assumption and present evidence that the assumption of time-invariant impact effects may be violated in previously used empirical models.