The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.

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Housing Market Spillovers: Evidence from an Estimated DSGE Model

This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment.

Credit and Banking in a DSGE Model of the Euro Area

This paper studies the role of credit-supply factors in business cycle ∞uctuations. To this end, an imperfectly competitive banking sector is introduced into a DGSE model with flnancial frictions. Banks issue loans to both households and flrms, obtain funding via deposits and accumulate capital out of retained earnings. Margins charged on loans depend on bank capital-to-asset ratio and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which afiects bank proflts and thus capital, and the supply and the cost of loans. The model is estimated with Bayesian techniques using data for the euro area. We show that shocks originating in the banking sector explain the largest fraction of the fall of output in 2008 in the euro area, while macroeconomic shocks played a smaller role. We also flnd that an unexpected reduction in bank capital can have a substantial impact on the real economy and particularly on investment. JEL: E30; E32; E43; E51; E52;

/pdf/credit-and-banking-in-a-dsge-model-of-the-euro-area-o8cxnpx1ou.pdf

Credit and banking in a DSGE model of the euro area

Innovation in SMEs exhibits some peculiar features that most traditional indicators of innovation activity do not capture Therefore, in this paper, we develop a structural model of innovation which incorporates information on innovation success from firm surveys along with the usual R&D expenditures and productivity measures We then apply the model to data on Italian SMEs from the “Survey on Manufacturing Firms” conducted by Mediocredito-Capitalia covering the period 1995-2003 The model is estimated in steps, following the logic of firms’ decisions and outcomes We find that international competition fosters R&D intensity, especially for high-tech firms Firm size, R&D intensity, along with investment in equipment enhances the likelihood of having both process and product innovation Both these kinds of innovation have a positive impact on firm’s productivity, especially process innovation Among SMEs, larger and older firms seem to be less productive

/pdf/innovation-and-productivity-in-smes-empirical-evidence-for-11nyu56d1e.pdf

Innovation and Productivity in SMEs - Empirical Evidence for Italy

Innovation in SMEs exhibits some peculiar features that most traditional indicators of innovation activity do not capture Therefore, in this paper, we develop a structural model of innovation that incorporates information on innovation success from firm surveys along with the usual R&D expenditures and productivity measures We then apply the model to data on Italian SMEs from the “Survey on Manufacturing Firms” conducted by Mediocredito-Capitalia covering the period 1995–2003 The model is estimated in steps, following the logic of firms’ decisions and outcomes We find that international competition fosters R&D intensity, especially for high-tech firms Firm size and R&D intensity, along with investment in equipment, enhances the likelihood of having both process and product innovation Both these kinds of innovation have a positive impact on firm’s productivity, especially process innovation Among SMEs, larger and older firms seem to be less productive

/pdf/innovation-and-productivity-in-smes-empirical-evidence-for-3kwfj88pbf.pdf

Innovation and productivity in SMEs: empirical evidence for Italy

Even low levels of trend inflation substantially affect the dynamics of a basic new Keynesian DSGE model when monetary policy is conducted by a contemporaneous Taylor rule. Positive trend inflation shrinks the determinacy region. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that in the long run the nominal interest rate should be raised by more than the increase in inflation, is a sufficient condition for local determinacy of equilibrium. This finding holds for different types of Taylor rules, inertial policy rules and price indexation schemes. Therefore, regardless of the theoretical set up, the monetary literature on Taylor rules cannot disregard average inflation in both theoretical and empirical analysis.

Trend Inflation, Taylor Principle and Indeterminacy

https://isiarticles.com/bundles/Article/pre/pdf/26250.pdf

Optimal Monetary Policy Under Low Trend Inflation

An important concern for the European Central Bank (ECB), and all central banks alike, is the necessity of making decisions in real-time under conditions of great uncertainty about the underlying state of the economy. We address this concern by estimating on real-time data a New Keynesian model for the euro area under the assumption of imperfect information. In comparison to models that maintain the assumption of perfect information and are estimated on ex-post revised, we find that: (i) the estimated policy rule becomes more inertial and less aggressive towards inflation; (ii) the ECB faces a more severe trade-off in the stabilisation of inflation and the output gap.

https://papers.ssrn.com/sol3/Delivery.cfm/j_1468-0297_2011_02488_x_wml.pdf?abstractid=2073105&mirid=1&type=2

Imperfect Information, Real‐Time Data and Monetary Policy in the Euro Area

When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains.

Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio?

In this paper we use a single-equation time series approach to examine the macroeconomic determinants of banks’ loan quality in Italy in the past twenty years, as measured by the ratio of new bad loans to the outstanding amount of loans in the previous period. We analyse the quality of loans to households and firms separately on the grounds that macroeconomic variables may affect these two classes of borrowers differently. According to our estimated models: i) the quality of lending to households and firms can be explained by a small number of macroeconomic variables mainly relating to the general state of the economy, the cost of borrowing and the burden of debt; ii) changes in macroeconomic conditions generally affect loan quality with a lag; and iii) the out-of-sample prediction accuracy of the models is quite satisfactory and proved to be robust to the recent financial crisis.

/pdf/macroeconomic-determinants-of-bad-loans-evidence-from-2wtcsmnc3c.pdf

Tiziano Ropele

Papers

Trend Inflation, Taylor Principle and Indeterminacy

Optimal Monetary Policy Under Low Trend Inflation

Imperfect Information, Real‐Time Data and Monetary Policy in the Euro Area

Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio?

Macroeconomic Determinants of Bad Loans: Evidence from Italian Banks