research

We examine how fluctuations in the house price-rent spread, which reflect shifts in expectations about future house price growth, impact household consumption while considering the role of credit constraints. A rise in the spread, indicating higher expected future house prices relative to rents, boosts household consumption and eases credit constraints. By incorporating a housing spread shock into a model of household decision-making with borrowing frictions, we analyze data from 28 OECD countries over 50 years. Our findings demonstrate that shocks to the housing spread provide a sustained stimulus to household consumption by enhancing expected future wealth and reducing borrowing frictions. In contrast, credit shocks lead to immediate but short-lived 'boom-bust' cycles. The combined effects of housing spread and credit shocks reveal significant asymmetries, particularly during crises. These results highlight the need for policies that jointly address credit conditions and household expectations to effectively stabilize the economy.

This paper examines the impact of US monetary policy tightening on emerging markets, distinguishing between direct and indirect spillover effects using the global vector autoregression with stochastic volatility covering 32 countries. The paper shows that an increase in the US interest rate significantly reduces output for emerging markets, leading to larger, more prolonged, and persistent declines. Such an impact is further intensified by global trade integration, causing a sharper yet slightly quicker rebounding output drop. The spillover effects are significantly amplified when US monetary policy tightening is accompanied by an increase in monetary policy uncertainty. Finally, emerging markets exhibit considerable heterogeneity in their responses to US monetary policy shocks.

We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. In 2014, Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

We build a new empirical model, which admits time-varying variances of local structural shocks, to estimate the global impact of an increase in the volatility of US monetary policy shocks. By allowing for rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate. We document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy.

We examine firms' employment adjustments immediately after the imposition of stringent lockdown. In doing so, we use monthly administrative data, and take value-added tax payment changes as a proxy for the demand shock. We merge data with COVID-19 tests, classified by economic activity, and employ a fixed effects instrumental variable regression. We find that all sized firms in the manufacturing sector reduced employment more if they had uncovered tax liabilities before the lockdown. Among small firms, real estate and service sector firms downsized more rapidly. While employment changes are rather modest, this very early evidence points to the need to address liquidity needs and firm pre-conditions among capital-intensive and service firms and, in particular, small businesses, to avoid employment losses. 

Do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed? The answer to this question is a firm, yes. We document the vital role of accommodative monetary policy for an increase in unemployment benefits, spending on active labor market policies, and labor market deregulation to boost growth and reduce unemployment. It was found that if interest rates cannot be reduced, then unemployment benefits should be lowered. A more rigid labor market, it was further found, can deliver expansionary effects, especially during the crisis period.

We introduce frictional unemployment in a multiworker heterogeneous firm model with a dynamic matching process, one‐ and two‐sector equilibria, and international markets. A change in labour market policies transforms the share of exporters and affects average productivity. The closure of equilibrium with or without sectoral arbitrage plays an important role in generating macro‐level outcomes for employment subsidies. Unemployment benefits, on the other hand, make unemployment and openness rise, independently of sectoral reallocations. We also find that simultaneous implementation of labour market policies remove potential gain in the trade share, and, when it comes to unemployment benefits, may even be detrimental.

Motivated by the rise in capital flows to low‐income countries (LICs), we examine the nature of these flows and the factors affecting foreign investors' decision. Recognizing the presence of fixed investment costs, we analyze capital flows at both intensive and extensive margins. To fix ideas, we resort to the gravity literature for the estimating relationships which we embed into a two‐tier econometric framework with cross‐sectional dependence. Our main finding is that market entry costs are statistically and economically very detrimental to LICs. We also obtain the gravity‐type relationship for the destination income unconditionally but not after conditioning on relevant variables, as well as establish labor productivity as a robust attractor of capital inflows. 

Do labor market policies initiated in periods of loose monetary policy yield different outcomes from those introduced when monetary tightening prevails? Using data from 11 euro-area members up to 2010--and extending to 17 countries up to 2020--we analyze three labor market policies: replacement rates, spending on active labor market policies (ALMPs), and employment protection. We find that these policies deliver different macroeconomic outcomes in low- and high-interest rate environments. In particular, ALMPs reduce unemployment if implemented under a loose monetary policy but not otherwise, whereas higher employment protection delivers expansionary effects under a tight monetary policy. These findings highlight that the effectiveness of labor market policies is significantly influenced by the monetary policy environment, emphasizing the need for coordinated policy design.  Methodologically, we contribute by proposing to average local projections using Mallow's $C_{p}$  criterion, allowing for inferences that are robust to mis-specification and accommodate non-linearities.

What would have been the hypothetical effect of monetary policy shocks had a country never joined the euro area, in cases where we know that the country in question actually did join the euro area? It is one thing to investigate the impact of joining a monetary union, but quite another to examine two things at once: joining the union and experiencing actual monetary policy shocks. We propose a methodology that combines synthetic control ideas with the impulse response functions to uncover dynamic response paths for treated and untreated units, controlling for common unobserved factors. Focusing on the largest euro area countries, Germany, France, and Italy, we find that an unexpected rise in interest rates depresses inflation and significantly appreciates exchange rate, whereas GDP fluctuations are less successfully controlled when a country belongs to the monetary union than would have been the case under the independent monetary policy. Importantly, Italy turns out to be the overall beneficiary, since all three channels – price, GDP, and exchange rate – deliver the desired results. We also find that stabilizing an economy within a union requires somewhat smaller policy changes than attempting to stabilize it individually, and therefore provides more policy space.

We employ the recent Jordà, Schularick, and Taylor (2016) and Knoll, Schularick, and Steger (2017) datasets to investigate the long-run relationship between house prices and credit volume, allowing for interest rate, real exchange rate and real gross domestic product (GDP). We refine the analysis using data at the quarterly-level to define relevant co-integrating relationships across a number of European economies. Housing, GDP and credit cross-sectional averages are included in the analysis to detect the effects of common factors. Empirical results indicate the presence of cross-country heterogeneities and an uneven feedback mechanism between credit and housing – the full loop is established only for several countries in the dataset. Grouping countries for panel-like econometric exercises may lead to spurious regression results, poor inference and misleading policy implications. Short-run dynamics, compared to the long-run may often lead to contradicting policy advice if the order of integration of the house price series is not properly accounted for. Furthermore, the presence of spatial patterns of house prices and credit highlight the need to consider global housing and credit developments for national policy making.

In this paper we examine plausible macroeconomic responses to the ex ante (planned but not implemented yet) reforms in the labor market, taking a currently proposed Social Model in Lithuania as an example. We contribute not only to the current debate on the efficacy of announced structural reforms, but also to the literature on policy evaluation, by assessing reforms from a global perspective. Taking trade linkages and openness into account, we demonstrate macroeconomic reactions to shocks in unemployment benefits, active labor market policies, and tax wedge on the reforming economy. In particular, we show that the omission of an international dimension could lead to seriously biased results on policy effects for any open and small economy. Using a satellite model for the intermediate trade, we link the global framework with the sectoral extensive margin, which changes some of the results derived from the aggregate data.  

Recent turbulent times have spurred a response by policy-makers to engage in a number of labour market reforms to enhance economic resilience and flexibility. Amid discussions about the most efficient ways to conduct such reforms, whether individually or simultaneously, we still lack evidence on the cross-country interactions and international interdependencies that may strengthen or weaken economic responses within an economic union. This paper deals with three policy tools – unemployment benefits, activation policies and the tax wedge, and demonstrates that they dissipate across open economies. We document evidence of both positive and negative policy spillovers among European economies and carry out a counterfactual of coordinated policies which prove to be needed for some but not other policy variables. We find that coordination strengthens macroeconomic responses to labour market policies.  

This paper examines how export activity impacts a firm's energy intensity, emphasizing the upgrading process. We introduce a firm-level complexity index incorporating two dimensions: the complexity of the traded goods and market destinations. We show that growth in external demand incentivizes firms to undertake upgrading activities, resulting in lower energy intensity. However, financial constraints diminish the energy efficiency gains from upgrading, especially for small firms. Additionally, upgraded firms can leverage higher markups, but this is effective only for larger firms. The findings suggest targeted support for small firms and underscore the necessity of open trade in a fragmented global landscape.

We show that U.S. trade protectionism shocks cause the cyclical component of the aggregate U.S. price markup to increase significantly over time. However, if trade barrier announcements are covered by the media, which may help form expectations about the future, we find that the aggregate U.S. price markup response is zero upon impact, if not negative, before it eventually rises. We develop a simple canonical model of trade adjustment dynamics driven by habits in consumer preferences that replicates these empirical responses and use it to quantify the welfare implications. In the model, firms cut markups preemptively in anticipation of future trade barriers by factoring in the time that it takes to wean addicted consumers off of imported varieties.

Changes in trade policy set in motion the transitional adjustment dynamics of trade flows. In this paper, we estimate that the duration of this transition phase: (i) varies substantially across different trade partners; and (ii) on average takes less time compared to the existing estimates. We infer this from an extended gravity model that incorporates and parameterizes a new concept called "shared history". This allows us to specify a generalized dynamic gravity equation in which there are bilaterally heterogeneous autocorrelation coefficients of bilateral trade flows and multilateral trade frictions. Our framework nests the standard static and dynamic specifications of the gravity model with homogeneous parameters as a special case. Compared to the standard empirical gravity methods, we estimate a significantly lower short-run and long-run trade elasticity averaged across trade partners, which translates to larger welfare gains from trade and a significantly lower average impact of regional trade agreements on trade flows.

We build a simple multi-country model with international trade in final and intermediate goods as well as a frictional labor market. We shed light on the channels how labor market reforms spill across economies and evaluate the empirical importance of the proposed channels. In the global vector auto-regression, we demonstrate that the choice of transmission weights, as well as theory-implied over-identifying restrictions, can be of first-order importance for the evaluation and design of a single and synchronized policy action. A counterfactual joint policy at the outset of the global financial crisis suggests that the replacement rate in unemployment may deliver a positive (demand boost) effect. However, only regulatory reform, namely employment protection, calls for coordinated implementation within the European Union, thereby boosting employment, GDP, trade competitiveness, and capital investment.

This paper combines current literature on the heterogeneous firms in international trade with the public economics of fiscal policy. We study the nexus between the intensive and extensive margins of trade, and their relationship with fiscal policy. When taxes are collected through the fixed per-period production payments, borne by all active firms, they impact firm partitioning and exporting decisions, but are nevertheless left unmodelled and treated as a pure loss in the literature. Instead, we show theoretically how such taxes can be channeled back into an open economy through spending on education (thereby affecting workers' skill distribution in non-trivial ways), and contrast the result with the standard trade liberalisation exercise and a wasteful channel, which are prevalent in the literature. We estimate the model's predictions using a novel data set covering 40 countries from 1995 to 2011. Employing the instrumental-variable panel techniques, we find support to our main testable predictions: fixed production taxes, used as the source to fund education, create an educational channel on the aggregate expenditure and the extensive margin of trade. A decrease in expenditure and an increase in the extensive margin are both amplified once an educational channel is allowed for.

Space is important. In this paper we use the global financial crisis as an exogenous shock to the German labor market to elucidate the spatial nexus between crime and unemployment. Our contribution is twofold: first, we lay down a parsimonious spatial labor market model with search frictions, criminal opportunities, and, unlike earlier analyses, productivity shocks which link criminal engagement with employment status. Second, we seek empirical support using data on the 402 German regions and years 2009−2010, in a setting that not only allows for crime spatial multipliers but also circumvents reverse causality by exploiting exogenous changes in unemployment due to the crisis. As predicted by our theory, the destruction of the lowest productivity matches, measured by increases in unemployment rates, has a significant impact on pure property crime (housing burglary and theft of/from motor vehicles) and street crime. The analysis offers important implications for local government policy.