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Keywords Occasionally binding constraints; Global nonlinearities; Financial frictions; Liquidity; Business cycles Abstract What drives nonlinearities in modern macroeconomic models? Building on global methods, the present paper isolates the effects associated with an occasionally binding constraint in a widely discussed macro-finance framework. Only the proper computational treatment provides a holistic understanding of the (hidden) economics in tail events, and the full reflection of large and consecutive shocks in economic forecasts. An improper treatment provides an overestimation of asset pricing dynamics and a misleading association between high levels of capital and liquidity and high levels of investment. Author Affiliation: Universität Zürich, Chair of Quantitative Business Administration, Plattenstrasse 14, CH - 8032 Zurich, Switzerland Article History: Received 18 February 2021; Revised 13 December 2022; Accepted 1 February 2023 (footnote)[white star] This paper is a revised version of the first chapter of our dissertation, written at the University of Zurich. It was selected for the student presentations of the Macro Financial Modeling Summer Session for Young Scholars 2017, held by the Becker Friedman Institute in Bretton Woods, NH (U.S.A.). We are grateful to two anonymous referees and the editor, Juan Francisco Rubio-Ramírez, for careful reviews of an earlier version of this paper. We are grateful to Johannes Brumm, Wouter den Haan, Martin Ellison, Andrea Eisfeldt, Lars Hansen, Felix Kübler, Alexander Ludwig, Walter Pohl, Pontus Rendahl, Andreas Schabert, Karl Schmedders, Andrés Schneider, Frank Schorfheide, Ctirad Slavík, and Sevin Yeltekin for helpful discussions. Finally, we thank Dave Brooks for excellent editorial support on earlier versions. A former version of this paper circulated under the preliminary title 'Occasionally Binding Liquidity Constraints and the Volatility of Consumption and Investment', under which it was also presented at the CEF 2013 in Vancouver and at the European Macro Workshop 2013 in London. Byline: Maximilian Werner [maximilian.werner@business.uzh.ch]

Keywords COVID-19; Social distancing policy; Mobility; Vaccination; Republic of Korea; Structural VAR; Threshold VAR Abstract This paper investigates the dynamic impact of social distancing policy on coronavirus disease (COVID-19) infection control, mobility of people, and consumption expenditures in the Republic of Korea. We employ structural and threshold vector autoregressive (VAR) models using big-data-driven mobility data, credit card expenditure, and a social distancing index. We find that the social distancing policy significantly reduces the spread of COVID-19, but there exists a significant, growing trade-off between infection control and economic activity over time. When the level of stringency in social distancing is already high, its marginal effect on mobility is estimated to be smaller than when social distancing stringency is low. The effect of social distancing also becomes secondary after vaccination. Increased vaccination is found to significantly reduce the critical cases while it increases visitors and consumption expenditures. The results also show that the effect of social distancing policy on mobility reduction is strongest among the population of age under 20 and the weakest among the population of age over 60. Author Affiliation: (a) Economic Research and Regional Cooperation Department at the Asian Development Bank (ADB), Philippines (b) Department of Economics, Seoul National University, Republic of Korea (c) Future Strategy Development Department, Korea Development Bank, Republic of Korea (d) Economic Research and Regional Cooperation Department, ADB, Philippines * Corresponding author. Article History: Received 10 October 2022; Revised 26 January 2023; Accepted 17 March 2023 (footnote) Note: In this paper, 'Korea' has been used to refer to the Republic of Korea. Byline: Kijin Kim (a), Soyoung Kim [soyoungkim@snu.ac.kr] (b,*), Donghyun Lee (c), Cyn-Young Park (d)

Keywords Deformed likelihood; Dynamic systems; Judgment; Repeated games; Robust filtering Abstract We answer positively to this question by using Maximum Lq-Likelihood (or Deformed Likelihood) estimator. This is based on a parameter which measures the aggregate quote of judgment in the forecasting (game-based) system formed by three players--Forecaster, Policy Maker and Reality. For the first time in econometric literature, we apply this estimator to a dynamic system and derive a robust version of the Kalman Filter--the Deformed Kalman Filter (DKF). The evidence from U.S. data suggests that the judgmental dynamics exists and is correlated (but not coincident) with the phases of the Business Cycle. Furthermore its knowledge improves in-sample as well as out-of-sample estimation. Author Affiliation: University of Bergamo, Department of Economics, Via dei Caniana, 2 - 24127, Bergamo, Italy Article History: Received 20 August 2022; Revised 21 December 2022; Accepted 3 March 2023 (footnote)1 The Author is particularly grateful to Giovanni Urga and Salvatore Piccolo for their support. He also thanks Barbara Annicchiarico, Marcelle Chauvet, Raffaella Giacomini, Ana Maria Herrera, Alessandra Luati, Giuseppe Ragusa, Francesco Ravazzolo and Tom Stark for their feedback, as all the participants to the 2nd Ventotene Workshop in Macoreconomics, the 41st International Symposium on Forecasting 2021, the internal Seminar Series in Mathematics and Statistics of the University of Bergamo, the IWEEE2022 in Rimini and the IAAE2022 in London. In some of that occasion the paper had been presented with the title 'Measuring Unobserved Strategic Judgment'. The co-editor, Juan Francisco Rubio-Ramirez, and a referee are grateful for their contributions to the paper's readability and scientific correctness. Finally, the Author is in debt with doctors, nurses and workers of Policlinico 'S. Matteo' of Pavia, without whose uncompensated cares this paper would not have been written. Byline: Emilio Zanetti Chini [emilio.zanettichini@unibg.it] (1)

Keywords Quantitative easing; Global financial cycle; Domestic credit; Exchange rate interventions; Capital controls; Macroprudential policy Abstract Large international capital movements tend to be associated with strong fluctuations in asset prices and credit, contributing to domestic financial cycles and posing challenges for stabilization policies, especially in emerging market economies. In this paper we argue that these challenges are particularly severe if the global financial cycle is driven by quantitative easing (QE) in the US, and when the local banking sector has large holdings of government bonds, like in many Latin American (LA) countries. We first investigate empirically the impact of a typical round of QE by the US Fed on LA economies, finding a persistent expansion in credit to households and house prices, as well as a significant loss of price competitiveness. We next develop a quantitative macroeconomic model of a small open economy with segmented asset markets and banks, which accounts for these observations. In this framework, foreign QE creates tensions between macroeconomic and financial stability as a contractionary impact of exchange rate appreciation is accompanied by booming credit and house prices. As a consequence, conventional monetary policy accommodation aimed at stabilizing output and inflation would further exacerbate domestic financial cycle. We show that an effective way of resolving this trade-off is to impose measures that directly reduce the inflow of capital. Combining foreign exchange interventions with tightening of local credit policies can also restore macroeconomic and financial stability, but at the expense of a large redistribution of wealth between borrowers and savers. Author Affiliation: (a) SGH Warsaw School of Economics and International Monetary Fund. Al. Niepodleglosci 162, Warszawa 02-554, Poland (b) University of Warsaw * Corresponding author. Article History: Received 3 June 2022; Revised 1 March 2023; Accepted 3 March 2023 (footnote)[white star] This paper benefited from discussions with M.Brzoza-Brzezina, M.Gradzewicz, J.Lindé, B.Mackowiak, I.Presno, R.Priftis, R.Reis, H.Rey, S.Schmitt-Grohe, and P.Zabczyk. The authors also acknowledge useful comments from two anonymous referees, as well as from participants at the IAAE Annual Meeting in Rotterdam, CEF Conference in Tokyo, 3rd Warsaw Money-Macro-Finance Conference, CBMMW in Santiago de Chile, Warsaw Economic Seminar (all held virtually), and 10th Summer Workshop in Macroeconomics and Finance in Warsaw. The views expressed herein are those of the authors and not of the institutions they are affiliated with. Declarations of interest: none. Byline: Marcin Kolasa [mkolas@sgh.waw.pl] (*,a), Grzegorz Wesolowski (b)

Keywords Grossman-Stiglitz-style and kyle-style models; Dampening effect; Price informativeness and short-term return reversals; Contrarian trading; Aggregate risk Abstract The way informed traders use their privileged information affects the properties of asset prices. This paper analyzes the differences in market efficiency between the two most widely adopted informed trading paradigms (Grossman-Stiglitz-style and Kyle-style) in a unified three-period framework. The aggregate risk--the product of fundamental risk, liquidity trading risk, and traders' risk aversion coefficient--uniquely determines three measures of market efficiencies, including price informativeness, return autocorrelations, and the unconditional expected utilities of uninformed market makers. In the Kyle-style model, a self-reinforcing dampening effect arises from informed traders' trading on fundamental information and non-fundamental information about their prior positions, leading to less efficient markets, contrarian trading by informed traders, and a return reversal between the two trading periods. Our study proposes to estimate price informativeness using information from short-term return reversals. Author Affiliation: ShanghaiTech University, Shanghai 201210, China * Corresponding author. Article History: Received 28 August 2022; Revised 11 January 2023; Accepted 14 January 2023 (footnote)1 I am very grateful to two anonymous referees; an anonymous associate editor, and Tony He (Editor) for their invaluable comments and suggestions. I am also very grateful to Wen Chen (discussant at CICF), Hanming Fang, Pete Kyle, Lionel Huntley Henderson, Alan Tucker, and seminar participants at the China International Finance Conference, Central University of Finance and Economics, Jiangxi University of Finance and Economics, Shanghai Jiaotong University, ShanghaiTech University, Southwestern University of Finance and Economics, Wellington finance summit, and University of Frankfurt for helpful discussions. I am solely responsible for any errors. This paper is supported by National Natural Science Foundation of China (No. 71773077). Byline: Mng Guo [guoming@shanghaitech.edu.cn] (*,1)

Keywords Yield curve; Government bonds; Country equity indexes; Interest rates; International stock markets; Asset pricing; Return predictability; The cross-section of stock returns Abstract Interest rate changes typically affect equity values. However, if investors react slowly, the repricing may stretch over time. Using a century of data from sixty countries, we demonstrate that past interest rate changes predict the cross-section of equity returns worldwide. The quintile of stock markets with the highest change in government bond yields underperforms the countries with the lowest change by 0.76% per month. The phenomenon is distinctly robust and cannot be explained by known risk factors. Furthermore, the low correlation with other return patterns paves the way for effective country allocation strategies. Author Affiliation: (a) Montpellier Business School, 2300, avenue des Moulins Cedex 4, Montpellier 34185, France (b) Department of Investment and Capital Markets, Institute of Finance, Poznan University of Economics and Business, Al. Niepodleglosci 10, Poznan 61-875, Poland (c) Nusret Cakici, Gabelli School of Business, Fordham University, 45 Columbus Avenue, Room 510, New York, NY 10023, USA (d) Robert Bianchi, Griffith Business School, Griffith University, 170 Kessels Road, Nathan, QLD 4111, Australia (e) Huaigang Long, School of Finance, Zhejiang University of Finance and Economics, 18 Xueyuan Street, Hangzhou, Zhejiang 310018, China * Corresponding author at: Montpellier Business School, 2300, avenue des Moulins Cedex 4, Montpellier 34185, France. Article History: Received 23 June 2022; Revised 3 November 2022; Accepted 5 January 2023 (footnote)* The authors are grateful to David Y. Aharon, Claudiu Albulescu, Nick Baltas, Demir Bektic, Debojyoti Das, Ender Demir, John Fan, Allaudeen Hameed, Fabian Hollstein, Wenjin Kang, Andreas Karathanasopoulos, Renatas Kizys, Frank Weikai Li, Gilbert Nartea, Isaac Otchere, Peter Pope, Krishna Reddy, Wael Rouatbi, Panagiotis Tzouvanas, Zaghum Umar, Mehmet Umutlu, Tingxi Zhang, and Yifeng Zhu whose constructive comments and suggestions have significantly improved the quality of the paper. Furthermore, we thank participants at the 31st EBES Conference, the 27th Annual Conference of the Multinational Finance Society, and the 2020 World Finance Conference for valuable feedback on the earlier versions of the paper. All remaining errors (if any) are the responsibilities of the authors. Adam Zaremba acknowledges the support of the National Science Center of Poland [grant no. 2019/33/B/HS4/01021]. Byline: Adam Zaremba [a.zaremba@montpellier-bs.com] (a,b,*), Nusret Cakici (c), Robert J. Bianchi (d), Huaigang Long (e)

Keywords Long-Run Risk; Short and Long-Run Required Capital; Risk Profile; Microprudential Supervision; Pension Fund; Low Carbon; Transition Risks Abstract One of the objectives of the recent microprudential regulation is to separate the computation of required capital for short-run and long-run risks. This paper provides a coherent framework to define, compute, and update these components. The approach is developed in greater details in the context of the transition to low-carbon economies. A numerical example is given. Acronyms ACPR, Autorité de Contrôle Prudentiel et de Résolution; BC, British Columbia; BIS, Bank for International Settlements; DICE, Dynamic Integrated Model of Climate and the Economy; EACDPF, Energy-Augmented Cobb-Douglas Production Function; EBA, European Banking Authority; ES, Expected Shortfall; EU, European Union; ESG, Environmental, Social and Governance; GHG, Greenhouse Gas.; GHGRP, Greenhouse Gas Emission Report; GICS, Global Industry Classification Standard; HCF, Hydrofluorocarbon; HLCCP, High Level Commission on Carbon Prices; HS, Harmonized System; HSBC, Hong-Kong Shanghai Banking Corporation; IAM, Integrated Assessment Model; ICS, Industry Classification System; ILS, Insurance Linked Security; IPCC, Intergovernmental Panel on Climate Change; IR, Investment Responsable (fund); ISIC, International Standard Industrial Classification; NACE, Nomenclature des Activités Commerciales et Économiques; NGFS, Network for Greening the Financial System; OECD, Organisation for Economic Co-operation and Development; PFC, Perfluorinated Hydrocarbons; RCC, Required Capital Call; SEC, Securities and Exchange Commission; SLB, Sustainability Linked Bonds; SREP, Supervisory Review and Evaluation Process; UIC, Uniform Integrable in Cesaro (sense); VaR, Value-at-Risk Author Affiliation: (a) University of Toronto (Canada), Toulouse School of Economics, CREST (France) (b) CREST (France) (c) University of Lausanne (Switzerland) * Corresponding author. Article History: Received 21 December 2021; Revised 21 July 2022; Accepted 29 July 2022 (footnote)[white star] The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Banque de France or the ACPR. The first author gratefully acknowledges financial support of the ACPR Chair 'Regulation and Systemic Risks', and the ERC DYSMOIA. We are grateful to anonymous referees and the editor (Giulia Iori) for useful comments and suggestions. We also thank participants at the 20th International CREDIT conference and at the 15th Financial Risks International Forum. Replication codes are available upon request. Byline: C. Gouriéroux [christian.gourieroux@ensae.fr] (a), A. Monfort [alain.monfort@ensae.fr] (b), J.-P. Renne [jean-paul.renne@unil.ch] (*,c)

This paper studies the extent to which biased policy preferences, motivated by narrow institutional mandates, affect the gains from coordination between monetary policy (which may respond to financial imbalances) and macroprudential regulation (in the form of capital requirements) in responding to financial stability considerations, and whether these mandates can be set optimally. Numerical experiments show that, depending on the degree of bias in policy preferences, coordination may not entail burden sharing (in the sense of one policymaker reacting more, and the other less, aggressively to financial stability concerns) and may not be Pareto improving relative to the Nash equilibrium--even though it may generate significant gains for the economy as a whole. The optimal institutional mandate, based on maximizing household welfare under coordination, internalizes the impact of the cost of each policymaker's own instrument use on policy decisions. As a result, there may be an inverse relationship between the degree of bias in preferences and the instrument manipulation cost. Author Affiliation: (a) School of Social Sciences, University of Manchester, United Kingdom (b) Economics Group, University of Liverpool, United Kingdom * Corresponding author. Article History: Received 24 August 2021; Revised 10 March 2022; Accepted 28 August 2022 (footnote)[white star] We are grateful to several colleagues, participants at various seminars, and especially two anonymous reviewers for many helpful comments. The views expressed in this paper are our sole responsibility. Appendices B, C and D are available upon request. Byline: Pierre-Richard Agénor (a), Timothy P. Jackson [timothy.jackson2@liverpool.ac.uk] (*,b)

Keywords Progressive taxation; Growth models; Inequality; Heterogeneous agents Abstract This paper examines the sensitivity of the growth-inequality tradeoff to the progressivity of the tax structure. Using an endogenous growth model calibrated to approximate the US tax structure, we simulate a 5% reduction in the economy-wide average tax rate attained by alternative combinations of a reduction in the base tax rate and an increase in progressivity. In all cases the dynamic responses across income classes are diverse. With fixed progressivity the tax benefits favor the poorer quintiles, but the richest quintile is the only group that increases its relative share of capital and income. The net long-run effect is a mild increase in the overall growth rate, accompanied by a substantial increase in inequality. Restructuring the tax cut by allowing a larger reduction in the base tax rate coupled with a large increase in progressivity, designed to maintain the tax burden on the richest quintile unchanged, the exact opposite responses emerge; growth and inequality both decline. By judicious choice of the crucial fiscal parameters, the tax cut can be structured so that the growth rate increases while inequality simultaneously declines. The required structural changes are small, highlighting the extreme sensitivity of the tradeoff to the degree of tax progressivity. Author Affiliation: (a) Universidade do Estado do Rio de Janeiro (UERJ), Brazil (b) University of Washington (UW), United States * Corresponding author. Article History: Received 30 March 2022; Revised 2 August 2022; Accepted 14 August 2022 (footnote)[white star] We gratefully acknowledge the constructive comments of two anonymous referees, the Associate Editor, and the Co-Editor B. Ravikumar. We also thank participants of the Latin American Meeting of the Econometric Society hosted by Universidad del Rosario in Colombia in October 2021, of the 42nd meeting of Sociedade Brasileira de Econometria held in December 2020, of the Association of Public Economic Theory Meeting, held in Marseille in June 2022, and of the North American Summer Meeting of the Econometric Society, held in Miami in June 2022, for their comments on earlier versions of this paper. Fernando Carneiro acknowledges that this study was financed in part by a scholarship for doctoral studies abroad granted by Coordenação de Aperfeiçoamento de Pessoal de Nível Superior -- Brasil (CAPES) of the Government of Brazil, and thanks the support provided by University of Washington during the period of his PhD visiting internship. Stephen Turnovsky acknowledges support from the Van Voorhis endowment at the University of Washington. Byline: Fernando Moraes Carneiro (a), Stephen J. Turnovsky [sturn@u.washington.edu] (b,*), Octavio Augusto Fontes Tourinho (a)

Keywords Occasionally binding constraints; Effective lower bound; Computational methods Abstract Structural estimation of macroeconomic models and new HANK-type models with extremely high dimensionality require fast and robust methods to efficiently deal with occasionally binding constraints (OBCs). This paper proposes a novel algorithm that solves for the perfect foresight path of piecewise-linear dynamic models. In terms of computation speed, the method outperforms its competitors by more than three orders of magnitude. I develop a closed-form solution for the full trajectory given the expected duration of the constraint. This allows to quickly iterate and validate guesses on the expected duration until a perfect-foresight equilibrium is found. A toolbox, featuring an efficient implementation, a model parser and various econometric tools, is provided in the Python programming language. Benchmarking results show that for medium-scale models with an occasionally binding interest rate lower bound, more than 150,000 periods can be simulated per second. Even simulating large HANK-type models with almost 1000 endogenous variables requires only 0.2 milliseconds per period. Author Affiliation: Institute for Macroeconomics and Econometrics, University of Bonn, Adenauerallee 24--42, Bonn 53113, Germany Article History: Received 31 January 2022; Revised 6 July 2022; Accepted 6 September 2022 (footnote)[white star] I am grateful to Flora Budianto, Hans-Martin von Gaudecker, Alexander Meyer-Gohde, Tom Holden, Kenneth Judd, Alexander Richter, Felix Strobel, two anonymous reviewers and participants of the 2018 Stanford MMCI Conference, the 2018 EEA Annual Congress and the 2018 VfS Jahrestagung for discussions and helpful comments on the contents of this paper. Part of the research leading to the results in this paper has received financial support from the Alfred P. Sloan Foundation under the grant agreement G-2016-7176 for the Macroeconomic Model Comparison Initiative (MMCI) at the Institute for Monetary and Financial Stability. I gratefully acknowledge financial support by the DFG under CRC-TR 224 (projects C01 and C05) and under project number 441540692. Byline: Gregor Boehl [gboehl@uni-bonn.de]

Keywords Multiple credit constraints; Nonlinear estimation of DSGE models; State-dependent credit origination Abstract I explore the implications of borrowers facing both loan-to-value (LTV) and debt-service-to-income (DTI) limits, using an estimated DSGE model. I identify when each constraint dominated over the period 1985-2021: The LTV constraint initially dominates, due to loose DTI standards, as well as low house prices around recessions. From 2012, tighter DTI standards and growing house prices have kept the DTI constraint binding. Whether a constraint binds shapes macroeconomic outcomes and the effectiveness of macroprudential tools. Finally, county panel data attest to multiple credit constraints as a source of nonlinear dynamics. Author Affiliation: Economics and Monetary Policy, Danmarks Nationalbank, Langelinie Allé 47, 2100 Copenhagen Ø, Denmark * Corresponding author. Article History: Received 2 December 2021; Revised 31 May 2022; Accepted 1 August 2022 (footnote)[white star] I am grateful to my thesis advisors, Emiliano Santoro and Søren Hove Ravn, for their guidance and support. I would moreover like to thank Martín Gonzalez-Eiras, Daniel Greenwald, Vincent Sterk, and Roman Sustek for their detailed and constructive reports on the paper, written with regard to my thesis defense and publication in Norges Bank's working paper series. The paper has benefited from conversations with David Arseneau, Jens H.E. Christensen, Thomas Drechsel, Jeppe Druedahl, Francesco Furlanetto, Paolo Gelain, Luca Guerrieri, Wouter den Haan, Matteo Iacoviello, Søren Leth-Petersen, Enrique Mendoza, Johannes Poeschl, Antonio Sanchez, Alessia De Stefani, Javier Suarez, Peter Norman Sørensen, Egon Zakrajsek, among many others, discussions by Simon Christiansen, Josef Hollmayr, Rasmus Bisgaard Larsen, Galo Nuño, and Michael O'Grady, and comments by seminar audiences and two referees. The views expressed in the paper do not necessarily reflect the views of Danmarks Nationalbank. Declarations of interest: none. First version: December 2017. Byline: Marcus Mølbak Ingholt (*)

Keywords Predictive inference; State space models; Stochastic volatility; Time-varying parameters Abstract This paper proposes methods for Bayesian inference in time-varying parameter (TVP) quantile regressions (QRs) featuring conditional heteroskedasticity. I use data augmentation schemes to render the model conditionally Gaussian and develop an efficient sampling algorithm. Regularization of the high-dimensional parameter space is achieved via dynamic shrinkage priors. The merits of the proposed approach are illustrated in a simulation study, and a simple version of TVP-QR based on an unobserved components model is applied to dynamically trace the quantiles of inflation in the United States, the United Kingdom and the euro area. In an out-of-sample forecast exercise, I find the proposed model to be competitive and perform particularly well for higher-order and tail forecasts. A detailed analysis of the resulting predictive distributions reveals that they are sometimes skewed and occasionally feature heavy tails. Author Affiliation: Department of Economics, University of Salzburg, Mönchsberg 2a, 5020 Salzburg, Austria Article History: Received 13 April 2022; Revised 31 May 2022; Accepted 8 July 2022 (footnote)[white star] This paper was previously circulated as 'Tail forecasts of inflation using time-varying parameter quantile regressions' (arXiv:2103.03632). I gratefully acknowledge valuable comments and suggestions by Niko Hauzenberger, Paul Hofmarcher, Florian Huber, Gary Koop, James Mitchell, Christoph Pfarrhofer and Anna Stelzer, and financial support by the Austrian Science Fund (FWF, grant no. ZK 35). Codes and replication files are available at github.com/mpfarrho/tvp-qr. Byline: Michael Pfarrhofer [michael.pfarrhofer@plus.ac.at]

Keywords Markov chain approximation; Dynamic programming; Numerical methods; Financial frictions Abstract In this paper we explore some benefits of using the finite-state Markov chain approximation (MCA) method of Kushner and Dupuis (2001) to solve continuous-time optimal control problems in economics. We first show that the implicit finite-difference scheme of Achdou et al. (2022) amounts to a limiting form of the MCA method for a certain choice of approximating chains and policy function iteration for the resulting system of equations. We then illustrate that relative to the implicit finite-difference approach, using variations of modified policy function iteration to solve income fluctuation problems both with and without discrete choices can lead to an increase in the speed of convergence of more than an order of magnitude. Finally, we provide several consistent chain constructions for stationary portfolio problems with correlated state variables, and illustrate the flexibility of the MCA approach by using it to construct and compare two simple solution methods for a general equilibrium model with financial frictions. Author Affiliation: (a) Federal Reserve Bank of Cleveland, United States (b) Ryerson University, Canada * Corresponding author. Article History: Received 11 February 2021; Revised 25 April 2022; Accepted 13 May 2022 (footnote)[white star] The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of Cleveland or the Federal Reserve System. We appreciate comments from Ben Craig, Jesus Fernandez-Villaverde, Pablo Guerron, Ben Moll, Sergio Ocampo, Guillaume Sublet and seminar participants at various conferences and universities. All remaining errors are our own. Replication materials may be found at https://github.com/tphelanECON/EslamiPhelan_MCA. Byline: Thomas Phelan (*,a), Keyvan Eslami (b)

Keywords COVID-19; Estimated DSGE model; Euro area; Recession; Forced savings Abstract This paper augments the European Commission's open-economy DSGE model (GM) with COVID-specific shocks ('forced savings', labour hoarding) and financially-constrained investors to account for the extreme volatility of private domestic demand and hours worked during COVID-19, and it estimates the model on euro area data for the period 1998q4--2021q4. It takes a pragmatic approach of adapting the workhorse model of a policy institution to COVID-19 data. 'Forced savings' are central to explain quarterly real GDP growth during the pandemic, complemented by contributions from foreign demand and trade, and the negative impact of persistently higher savings after the first wave. We provide extensive model validation, including a comparison to off-model evidence for COVID-related restrictions, and a comparison of different model specifications. Author Affiliation: (a) Joint Research Centre, European Commission, TP581, 21027 Ispra (VA), Italy (b) Directorate-General Economic and Financial Affairs, European Commission, Rue de la Loi 170, 1049 Brussels, Belgium (c) Central Bank of Malta, Castille Place, Valletta VLT 1060, Malta * Corresponding author. Article History: Received 25 November 2021; Revised 17 June 2022; Accepted 14 August 2022 (footnote)[white star] We thank Björn Döhring, Martin Eichenbaum, Jan in 't Veld, Robert Kollmann, João Leal, Sergio Rebelo, Werner Roeger, Mathias Trabandt and Milan VýsÌkrabka for useful comments and discussions, as well as conference participants at the 11th RCEA Money, Macro & Finance Conference, and the Applied Econometrics for Macroeconomics Workshop. We are particularly grateful to Lorenzo Frattarolo, Susanne Hoffmann and João Leal for preparing the dataset. The views expressed in this paper are those of the authors and should not be attributed to the European Commission or the Central Bank of Malta (CBM). The work had been largey completed before Massimo Giovannini joined the CBM. Byline: Roberta Cardani (a), Olga Croitorov (b), Massimo Giovannini (a,c), Philipp Pfeiffer (b), Marco Ratto [marco.ratto@ec.europa.eu] (a,*), Lukas Vogel (b)

Keywords Information asymmetry; Adverse selection; Capital reallocation; Real business cycle Abstract Cun (2021) posits information cycles as a new perspective to understand business cycle patterns, and in particular, patterns regarding capital reallocation. In the model of this paper, the degree of information asymmetry on capital quality is endogenously determined and varies with business cycles. The information cycles significantly exacerbate the macroeconomic effects compared to a model where the degree of information asymmetry is constant. This important result provides an alternative explanation for what drives the highly volatile and procyclical nature of capital reallocation. I discuss some qualitative and quantitative implications of this model, as well as potential extensions. Author Affiliation: School of Economics, Fudan University. Shanghai Institute of International Finance and Economics, China * Corresponding author. (footnote)1 I thank the editors and participants at the 2021 Conference on Markets on Markets & Economies with Information Frictions. I also thank Michael Sockin for valuable comments and suggestions, which improve this paper significantly. Byline: Jing Zhou [jingzhou@fudan.edu.cn] (1,*)

Keywords Rational expectations equilibrium; Heterogenous information; Diffusions; Welfare; Regulation Abstract This paper examines welfare properties of equilibra in the general dynamic model with asymmetric information of Detemple et al. (2020). Explicit formulas for ex-ante and interim welfare are obtained, and equilibria are compared. We show a tax structured as an exchange option based on public information induces the insider to optimally forgo using her private information at all times. Author Affiliation: Questrom School of Business, Boston University, Boston, MA, USA * Corresponding author. (footnote)[white star] The paper was presented at the 2021 Conference on Markets and Economies with Information Frictions. We thank the discussant, Tao Li, for constructive comments. Byline: Jerome Detemple [detemple@bu.edu] (*), Marcel Rindisbacher, Scott Robertson

Mediator proposals can accelerate agreement and increase welfare even if the mediator is entirely uninformed. We demonstrate this by adding random mediation to the Cramton (1992) bargaining model. Mediation increases welfare by pooling types, which reduces signaling costs. Size discovery mechanisms in financial markets, in which traders can trade at a frozen price, are analogous to mediator proposals and may increase gains from trade in markets in which traders are reluctant to signal trading intentions by posting limit orders. Author Affiliation: (a) Jones Graduate School of Business and School of Social Sciences Rice University, Houston, TX 77005, U.S.A (b) Division of Economic and Risk Analysis Securities and Exchange Commission, Washington, DC 20549, U.S.A * Corresponding author. (footnote)1 The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. This paper was produced as part of the Division of Economic and Risk Analysis' Working Paper Series. Papers in this series are the work of the authors and not the work of the Division or the Commission. Inclusion of a paper in this series does not indicate a Division or Commission determination to take any particular action or position. (footnote)2 We are very grateful to Markus Baldauf, Ron Giammarino, Hernan Ortiz-Molina, Snehal Banerjee, Bradyn Breon-Drish, Liyan Yang, Mallesh Pai, Hulya Eraslan, Yizhou Xiao (discussant), and seminar participants at UBC, Johns Hopkins, and UC-San Diego for helpful comments. Byline: Kerry Back [kerry.e.back@rice.edu] (*,a), Paul Barton (1,2,b)

Keyword lab experiments; the field; agent-based modeling; double auction; price formation Abstract Lack of generalizability appears to be at the center of the considerable resistance concerning laboratory evidence in economics research even though arguably laboratory experiments are a major source of knowledge in the social sciences (Falk and Heckman 2009). Traditionally researchers add more variations to the chosen dimensions of the existing experiments to extend the lab results to the field. We propose an alternative approach -- building empirically oriented models from lab data and demonstrating the applicability of the model to field data. As an illustration we form an explicit representation of how the prices emerged as a consequence of individuals' engagement in exchanges. We model such a sequential price formation process based on double auction data with and without information frictions and show that it is possible using such a transparent model of behavior of agents in a market to produce price sequences that have properties described across a variety of archival settings. We believe that this exercise is an important step in attempting to integrate theoretical, experimental, and archival work in accounting, economics, and finance. Author Affiliation: Rotman School of Management, University of Toronto * Corresponding author. (footnote) I thank Tim Baldenius, Philip Berger, Jeremy Bertomeu, Anne Beyer, Peter Bossaerts, Jeffrey Callen, Ramy Elitzur, Pingyang Gao, Steve Gjerstad, Jon Glover, Tony He, John List, Russell Lundholm, John O'Brien, Charles Plott, David Porter, Gordon Richardson, Florin Sabac, Vernon Smith, Gregory Waymire, Huaxiang Yin (discussant), and seminar and workshop participants at Carnegie Mellon University, the Economic Sciences Institute at Chapman University, University of Minnesota, University of Toronto, and the 2021 Conference and JEDC Special Issue on Markets and Economies with Information Frictions for helpful suggestions and comments. Financial support from the Rotman School of Management at the University of Toronto is acknowledged. The initial idea in this paper originated from a series of conversations with the late John Dickhaut. I benefited greatly from his guidance and encouragement, and I dedicate this paper to his memory. Byline: Baohua Xin [bxin@rotman.utoronto.ca] (*)

Keywords Asset bubbles; Speculation; Greater fool; Talent misallocation Abstract There is increasing evidence that the vibrant financial industry has generated a misallocation of human capital between the manufacturing sector and the service sector. In addition, growth in the financial sector has usually been accompanied by bubble booms. Thus, this paper advances a greater-fool-theoretical approach to talent misallocation when an economy experiences speculation-driven extrapolative bubbles. The equilibrium allocation of talent in the decentralized economy encourages too many agents to enter the financial sector. Not only do the overcrowded markets in the financial sector per se generate a negative externality on the manufacturing sector, but speculation is also a source of financial fragility. The reason for this is that when agents make decisions based on their information sets, they ignore the negative externality of congestion and the impact of the endogenous bubble-burst probability of their entry into the financial sector. An optimal policy across sectors is then proposed to fix the talent misallocation caused by speculative bubbles. Author Affiliation: (a) School of Economics and Management, Tsinghua University, China (b) Research Bureau, People's Bank of China * Corresponding author. (footnote)[white star] The paper was previously circulated under the title 'Asset Bubbles and Talent Misallocation: A Greater Fool Theoretic Approach'. We thank the Editors Tony He, Pengfei Wang, and Liyan Yang, and our discussant Yang Liu for helpful comments. We are also grateful to Zhifeng Cai, Wei Cui, Yi Wen, Bo Zhao, and Jihang Zhou, along with participants at the Conference on Markets and Economies with Information Frictions for useful discussions and comments. Feng Dong acknowledges the financial support from the National Natural Science Foundation of China (#72122011, #71903126) and Tsinghua University Spring Breeze Fund (#2020Z99CFW046). Yandong Jia acknowledges the financial support from the National Natural Science Foundation of China (#71873140). The views expressed here are only those of the individual authors and do not necessarily reflect the official positions of the People's Bank of China. Byline: Feng Dong [dongfeng@sem.tsinghua.edu.cn] (a), Yandong Jia [jyandong@pbc.gov.cn] (b), Siqing Wang [wangsq19@mails.tsinghua.edu.cn] (*,a)

This paper analyzes the optimal management of a pandemic (stay-at-home and vaccination policies) in a dynamic model. The optimal lockdown policies respond to the spread of the virus with significant restrictions to employment, followed by partial loosening before the peak of the epidemic. Upon the availability of a vaccine, the optimal vaccination policy has an almost bang-bang property, despite the loss of immunity of the vaccinated: vaccinate at the highest possible rate, and then rapidly converge to the steady state. The model illustrates interesting trade-offs as it implies that lower hospital capacity requires flattening the infection curve and hence a more stringent lockdown, but lower vaccination possibilities (both the likelihood of a vaccine and the vaccination rate) push the optimal lockdown policy in the opposite direction, even before the arrival of vaccine. The model implies that the 'dollar value of a vaccine decreases rapidly as time passes with the reinfection rate being an important determinant of the monetary value'. The value that society assigns to averting deaths is a major driver of the optimal policy. The sensitivity analysis shows that even for reasonable bounds of the economic and epidemiological parameters, the timing and the magnitude of the optimal policy varies substantially. Author Affiliation: (a) Federal Reserve Bank of St. Louis, USA (b) Washington University in St. Louis, USA * Corresponding author. (footnote)[white star] The views expressed in this paper do not necessarily reflect the position of the Federal Reserve Bank of St. Louis. We thank Emilio Espino, Miguel Faria-e-Castro, Piero Gottardi, Fernando Navajas, Andy Neumeyer, David Slusky and Chris Waller as well as participants in several seminars for their comments. Manuelli and Sanghi want to thank the Weidenbaum Center for financial support. Sanghi has also received support from the Koch Center for Family Business. Byline: Carlos Garriga (a), Rody Manuelli [manuelli@wustl.edu] (b,*), Siddhartha Sanghi (a)

Keywords Testing; Contact tracing; Empirical evaluation of epi-mac models Abstract With this paper, Eichenbaum, Rebelo, and Trabandt have made another insightful and influential contribution to the growing literature on the macroeconomics of epidemics. Their papers are paving the way to a new fascinating research program whose objective is to develop empirically plausible macroeconomic models of epidemics. I argued that estimating synthetic COVID shocks in familiar DSGE models provides a good benchmark to evaluate progress toward this goal (Ferroni et al., 2021). Furthermore, evaluating alternative containment measures and how these measures should be deployed (e.g., should containment measures be targeted to the workplaces or somewhere else?) are important matters this research agenda should address. My work with Rottner (Melosi and Rottner, 2020) contributes to developing methods allowing researchers to study contact tracing and testing in macro-epidemiological models of the type studied in Eichenbaum, Rebelo, and Trabandt's influential works. Author Affiliation: FRB Chicago and CEPR (footnote)[white star] I thank Matthias Rottner for his very useful comments. Russell Miles provided excellent research assistance. Any views expressed in this paper are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. Byline: Leonardo Melosi [leonardo.melosi@chi.frb.org]

Keywords COVID-19; Pandemic; Inequality; Policy; Transfers Abstract This comment briefly summarizes Hevia et al. (2022), who utilize a unique dataset to shed light on the inequality of the epidemiological burden for low- and high-income individuals in Bogotá. Some suggestions and ideas for future research are provided. Author Affiliation: FRB Dallas, United States (footnote)1 I thank the organizers of the 'FRB St. Louis-JEDC-SCG-SNB-UniBern Conference on Covid and the Economy' for inviting me to discuss this excellent paper, and I thank the conference participants, especially the authors of the paper, for their comments and suggestions. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Dallas or the Federal Reserve System. Byline: Sewon Hur [sewonhur@gmail.com] (1)

Keywords Epidemic; Comovement; Investment; Recession Abstract This paper documents the behavior of key macro aggregates in the wake of the Covid epidemic. We show that a unique feature of the Covid recession is that the peak-to-trough decline is roughly the same for consumption, investment, and output. In contrast to the 2008 recession, there was only a short-lived rise in financial stress that quickly subsided. Finally, there was mild deflation between the peak and the trough of the Covid recession. We argue that a New Keynesian model that explicitly incorporates epidemic dynamics captures these qualitative features of the Covid recession. A key feature of the model is that Covid acts like a negative shock to the demand for consumption and the supply of labor. Author Affiliation: (a) Northwestern University, Department of Economics, 2211 Campus Dr, Evanston, IL 60208, USA (b) NBER (c) Northwestern University, Kellogg School of Management, 2211 Campus Dr, Evanston, IL 60208, USA (d) CEPR (e) Goethe University Frankfurt, Theodor-W.-Adorno-Platz 3, Frankfurt am Main 60323, Germany (f) Halle Institute for Economic Research (IWH) * Corresponding author. (footnote)[white star] A previous version of this paper was titled 'Epidemics in the Neoclassical and New Keynesian models.' We are grateful to our discussant Leonardo Melosi, the editors Yongseok Shin and Guillaume Vandenbroucke, and to R. Anton Braun, Joao Guerreiro, Martín Harding, Laura Murphy, Hannah Seidl, and Pedro Teles for very helpful comments and suggestions. We thank Federico Puglisi for excellent research assistance. Replication codes are available on the authors' websites. Byline: Martin S. Eichenbaum [eich@northwestern.edu] (a,b), Sergio Rebelo [s-rebelo@kellogg.northwestern.edu] (*,b,c,d), Mathias Trabandt [mathias.trabandt@gmail.com] (e,f)

Keywords Shadow banking; Great recession; Slow recovery; Estimated DSGE models Abstract We argue that shocks to traditional and shadow banks were important drivers of the U.S. economy during the Great Recession and the Slow Recovery. This result follows from a DSGE model featuring a heterogeneous banking sector estimated from macroeconomic and financial observables. Our model attributes the Great Recession to negative shocks to the aggregate supply of loans. A more novel result is that a shock specific to shadow bank intermediation accounts for much of the Slow Recovery. Therefore, our estimates suggest that accounting for the collapse of shadow banking after the financial crisis is important to explain the subdued path of GDP, investment, and inflation several years into the recovery. Author Affiliation: (a) Toulouse School of Economics (TSE) and Université Toulouse 1 - Capitole, 21 allée de Brienne, Toulouse 31000, France (b) Banque centrale du Luxembourg (BCL), Département Économie et Recherche, 2 boulevard Royal, L-2983, Luxembourg * Corresponding author. Article History: Received 5 September 2021; Revised 31 March 2022; Accepted 12 April 2022 (footnote)[white star] This paper has been produced in the context of the partnership agreement between the BCL and TSE. For helpful comments, we thank James Bullard (the co-editor), an anonymous associate editor, two anonymous referees, Vincenzo Quadrini, and colleagues at the BCL and TSE, especially Paolo Guarda. We also thank participants at the 24th International Conference in Computing in Economics and Finance in Milan, the 2019 Annual Meeting of the Society for Economic Dynamics in Saint-Louis, and seminars at several universities. Patrick Fève acknowledges funding from the French National Research Agency (ANR) under the Investments for the Future (Investissements d'Avenir) program, grant ANR-17-EURE-0010. This paper should not be reported as representing the views of the BCL or the Eurosystem. Byline: Patrick Fève [patrick.feve@tse-fr.eu] (*,a), Alban Moura [alban.moura@bcl.lu] (b), Olivier Pierrard [olivier.pierrard@bcl.lu] (b)

In this paper, I study the optimal inflation rate in a sticky price economy where workers are heterogeneous in labor productivity and wage changes are subject to asymmetric adjustment costs. The model calibrated to U.S. micro wage data implies downward nominal wage rigidity (DNWR). The optimal inflation rate is substantially higher than stated in the literature in the presence of worker heterogeneity. A key to understanding the result is that DNWR causes a cross-sectional misallocation of labor as well as inefficient aggregate dynamics, enlarging the 'grease the wheels' effect of inflation. Author Affiliation: Economist, International Monetary Fund 1900 Pennsylvania Ave NW, Washington, DC 20431, United States Article History: Received 31 October 2020; Revised 25 February 2022; Accepted 1 March 2022 (footnote)[white star] This is a revised version of a chapter of my dissertation at Boston College. I am deeply grateful to Susanto Basu, Pablo A. Guerrón-Quintana, and Dongho Song for their invaluable guidance and support. I would like to thank two anonymous referees and the Editor, James Bullard, for insightful suggestions to improve the paper. I also thank Kosuke Aoki, Anthony M. Diercks, Nils Gornemann, Adam Guren, Peter Ireland, Pierre De Leo, Kazushige Matsuda, Shin-Ichi Nishiyama, and seminar and conference participants at Boston College, Johns Hopkins Carey Business School, 25th International Conference CEF at Carleton University, and University of Tokyo for their helpful comments and suggestions. The views expressed in this paper are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Byline: Tomohide Mineyama [TMineyama@imf.org]

Keywords Zero lower bound; High-frequency data; Government spending; Online price index; New Keynesian model; Credit constraints Abstract Are government spending shocks inflationary at the zero lower bound (ZLB)? Despite the importance of the inflation channel in amplifying government spending multipliers at the ZLB, empirical studies have not provided a clear answer to this question. Exploiting newly constructed high-frequency data on government spending and the price index of the U.S. economy, we find that prices decline in response to a positive government spending shock at the ZLB. Government spending shocks are also more deflationary at the ZLB than during normal times. While our finding is difficult to reconcile with standard New Keynesian models, which predict a larger fiscal multiplier following fiscal expansion at the ZLB--driven by rising inflation and a falling real interest rate--a model with credit constraints can explain this anomaly. Author Affiliation: (a) School of Economics, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 03722, South Korea (b) Department of Economics, Johns Hopkins University 3400N. Charles Street Baltimore, MD 21218, USA (c) School of Economics, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 03722, South Korea * Corresponding author. Article History: Received 5 August 2021; Revised 18 February 2022; Accepted 28 April 2022 (footnote)[white star] Comments from the editor (Juan Rubio-Ramirez) and three anonymous referees substantially improved the paper. We are thankful to Wongi Kim (discussant), Salem Abo-Zaid, Jaebin Ahn, Gillian Brunet, Daeha Cho, Lawrence Christiano, Jeongmin Ha, Joonyoung Hur, Kuk Mo Jung, Kwang Hwan Kim, Ryan Kim, Eunseong Ma, Kwangyong Park, Dongling Su, Donghoon Yoo and seminar participants at the HenU/INFER Workshop on Applied Macroeconomics 5.5, 2021 KER International Conference, Conference on 'The Effects and Limitations of Fiscal Policy in the New Normal,' 2022 Annual Meeting of Korea's Allied Economic Associations, Sogang University, and Seoul National University Institute of International Affairs for their helpful comments. We appreciate Alberto Cavallo for helping with daily data on the Online Price Index. This research was (in part) supported by the Yonsei Signature Research Cluster Program of 2021 (2021--22--0011). This paper was written when Junhyeok Shin was a graduate student at Yonsei University. Any errors are the authors' responsibility. Byline: Sangyup Choi [sangyupchoi@yonsei.ac.kr] (a,*), Junhyeok Shin (b), Seung Yong Yoo (c)

Keywords Structural VECM; Information shares; Microstructure noise; Independent component analysis; Directed acyclic graphs Abstract The possibility to measure the contribution of agents and exchanges to the price formation process in financial markets acquired increasing importance in the literature. In this paper I propose to exploit a data-driven approach to identify structural vector error correction models (SVECM) typically used for price discovery. Exploiting the non-Normal distributions of the variables under consideration, I propose a variant of the widespread Information Share measure, which I will refer to as the Directed Acyclic Graph based-Information Shares(DAG-IS), which can identify the leaders and the followers in the price formation process through the exploitation of a causal discovery algorithm well established in the area of machine learning. The approach will be illustrated from a semi-parametric perspective, solving the identification problem with no need to increase the computational complexity which usually arises when working at incredibly short time scales. Finally, an empirical application on IBM intraday data will be provided. Author Affiliation: Institute of Economics, Scuola Superiore Sant'Anna, Piazza Martiri della Libertá Pisa, 56127, Italy Article History: Received 7 August 2021; Revised 22 April 2022; Accepted 7 May 2022 (footnote)[white star] I am grateful to Alessio Moneta, Giacomo Bormetti, Fulvio Corsi, and Mattia Guerini for their precious comments. I gratefully acknowledge Joel Hasbrouck for sharing his data and useful clarifications. I am also particularly grateful to Marcelo Fernandes for the valuable suggestions, as well as to the participants of the 13th Annual SoFiE Conference for Young Scholars. I also thank two anonymous referees for their constructive comments which helped me to improve the paper. All errors are my own. Byline: Sebastiano Michele Zema [sebastianomichele.zema@santannapisa.it]

Keywords Health and income risks; Lifecycle; Incomplete insurance markets; Social insurance; Welfare; Optimal policy; Dynamic general equilibrium Abstract We quantitatively explore the economic effects of expanding the public and private components of the US health insurance system. Our analysis uses an overlapping generations model that comprises health risk, labor market risk, and key features of the US health insurance system such as private individual health insurance (IHI), employer sponsored group health insurance (GHI), means-tested public health insurance for low income individuals (Medicaid), and public health insurance for retired individuals (Medicare). Our simulations show that expanding Medicare to all workers--aka universal public health insurance (UPHI)--improves aggregate welfare if the coinsurance rate of UPHI is set to a higher level than the current Medicare coinsurance rate. There exists an optimal coinsurance rate that balances the incentive and insurance trade-off of the UPHI system and maximizes welfare outcomes. Allowing private health insurance to coexist with UPHI plans, lowers the overall fiscal cost of UPHI and results in larger welfare gains. Tax financing instruments matter for welfare outcomes. Using a consumption tax to finance the expansion of public health insurance leads to fewer distortions and improved welfare outcomes compared to income or payroll taxes. If, under the current US system, the government mandates GHI offers to become available to all workers, welfare gains can also be achieved. Author Affiliation: (a) Department of Economics, Towson University USA (b) Research School of Economics, Australian National University, Australia * Corresponding author. Article History: Received 30 January 2022; Revised 30 March 2022; Accepted 31 March 2022 (footnote)[white star] We would like to thank the editors and referees their constructive comments and suggestions. We also appreciate comments from Dirk Krueger, Ayse Imrohoroglu, Gary Hansen, Sagiri Kitao, Elena Capatina, Mariacristina De Nardi, Greg Kaplan, Mark Huggett, Aleh Tsyvinski, Kai Zhao and participants of ANU Macro-Health Economics Workshop 2018, Computing in Economics and Finance Conference 2017, the NBER Summer Institute 2015 Macro Public Finance Group, the Workshop of the Australasian Macroeconomics Society and research seminars at the Australian National University. Juergen Jung received a grant from the School of Emerging Technologies (SET) at Towson University. Beyond that he has no further relevant or material financial interests that relate to the research described in this paper. Chung Tran was supported by the Australian Research Council (ARC, Grant No.: CE170100005). Beyond that he has no further relevant or material financial interests that relate to the research described in this paper. The content is solely the responsibility of the authors and does not represent the official views of the supporting institutions. Byline: Juergen Jung [jjung@towson.edu] (a), Chung Tran [chung.tran@anu.edu.au] (*,b)

Keywords International trade; International business cycle comovement; Networks; Input-output linkages Abstract This paper revisits the relationship between trade and cross-country GDP correlation for 134 countries from 1970 to 2009. We introduce two notions of trade linkages: (i) direct bilateral trade index and (ii) common exposure to 'third' countries capturing the role of trade networks. Both are economically and statistically associated with GDP correlation, suggesting an indirect additional channel through which GDP fluctuations propagate through trade linkages. Moreover, high income countries become more synchronized when the content of their trade is tilted toward intermediate inputs while trade in final goods is key for lower income countries. Finally, we present evidence of an increase in the trade comovement slope over the last two decades, which may reflect the increase of the density of the international trade network. Author Affiliation: (a) Federal Reserve Board, United States (b) Toulouse School of Economics, France * Corresponding author at Board of Governors of the Federal Reserve System, 2051 Constitution Avenue NW, Washington, DC Article History: Received 7 August 2021; Revised 3 March 2022; Accepted 4 March 2022 (footnote)[white star] We thank the 2020 World Development Report team, seminar and conference participants and two anonymous referees for the very helpful comments and suggestions. The views in this paper are solely the responsibility of the authors and should not necessarily be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. We thank Henry Young for his superb research assistance. Byline: François de Soyres [francois.m.desoyres@frb.gov] (*,a), Alexandre Gaillard [alexandre.gaillard@tse-fr.eu] (b)

Keywords Entry and exit; Plant dynamics; Business cycles; Imperfect information Abstract In the U.S. manufacturing sector, the entry margin is strongly procyclical, whereas the exit margin is acyclical. This study attempts to explain the entry-exit margin asymmetry. It introduces imperfect information in an industry equilibrium model and finds that potential entrants cannot disentangle aggregate productivity from their own productivity, inducing a signal extraction problem. With imperfect information on the aggregate productivity, potential entrants underestimate variations in equilibrium factor prices and overestimate variations in the value of entering. This amplified entry margin, combined with a reasonable amount of general equilibrium forces, mute cyclical variations in the exit margin. With the proposed mechanism, the model economy generates 28% of the observed variations in the entrants' productivity. Notably, several testable implications of the model economy are consistent with the properties of the U.S. data. Author Affiliation: Department of Economics, Soongsil University, 369 Sangdo-ro, Dongjak-gu, Seoul 06978, Republic of Korea Article History: Received 5 November 2021; Revised 20 February 2022; Accepted 21 February 2022 (footnote)[white star] I would like to thank the anonymous referee for the extremely useful comments, which significantly improved the paper. I thank Ryan Michaels, Yongsung Chang, George Alessandria, Jay H. Hong, Mark Bils, Yan Bai, and Yoonsoo Lee for their valuable comments. All errors are mine. The previous version of this paper was circulated under the title 'The Cyclicality of Entry and Exit: A General Equilibrium Analysis with Imperfect Information'. This work was supported by the Soongsil University Research Fund (New Professor Support Research) of 2021. Byline: Jinhee Woo [jinheew@ssu.ac.kr]

Keywords Fiscal adjustment plans; Output; Risk; Financial market; Uncertainty; Monetary policy Abstract Recent empirical evidence suggests that fiscal consolidation based mainly on tax hikes has a more recessionary impact on economic growth than that based on expenditure cuts. This paper evaluates the effects of fiscal adjustment plans identified through the narrative approach on the U.S. macroeconomic activity. To do so, I incorporate fiscal plans into a vector autoregression model to investigate transmission channels of fiscal consolidation and accompanying policy. I check whether monetary policy, uncertainty, or financial markets can explain the heterogeneous effects of fiscal adjustment plans. I find that the financial market and macro uncertainty channels are the most important ones. Author Affiliation: National Research University Higher School of Economics, Moscow, Pokrovsky Boulevard 11, Russian Federation Article History: Received 5 July 2021; Revised 19 January 2022; Accepted 25 February 2022 (footnote)1 I am grateful to Carlo Favero and Francesco Giavazzi for their great advice throughout the whole process of writing this paper. I thank the Editor Juan Rubio-Ramirez, an anonymous referee, Óscar Jordà, Evi Pappa, Gernot Müller, Hubert Kempf, Morten Ravn, Francesco Caselli, Michael Weber, Arsenii Mishin, Anton Skrobotov, Eren Arbatli for their helpful comments and suggestions. I am grateful to seminar participants at Bocconi University, Lund University, Banque de France, Higher School of Economics (ICEF and FES), NEOMA Business School, and conference participants at the IAAE, ADEMU workshop, SSES, April International Academic Conference On Economic and Social Development, WinE EEA/ESEMI acknowledge financial support from Cariplo Foundation. Byline: Madina Karamysheva [mkaramysheva@hse.ru] (1)

Keywords Business cycle; Financial cycle; Financial shocks Highlights * Joint framework to estimate business and financial cycles with a medium-scale BVAR. * Financial shocks contributed 2 to 4% to the U.S. output gap in the 2000s. * Financial cycle booms do not always end with business cycle busts. * Macroprudential policy should not always curb credit booms. Abstract We jointly estimate the U.S. business and financial cycle through a unified empirical approach which also simultaneously quantifies the role of financial factors. Our approach uses the Beveridge-Nelson decomposition within a medium-scale Bayesian Vector Autoregression. First, we show, both in reduced form and when we identify a structural financial shock, that variation in financial factors had a larger role post-2000 and a more modest role pre-2000. Our results suggest that the financial sector did play a role in overheating the business cycle pre-Great Recession. Second, while an identified financial shock can generate a negative correlation between the lagged credit cycle and the contemporaneous output gap, the unconditional correlation between the credit cycle and the output gap is still positive. The latter at least suggests that one should be careful in associating an increase in the financial cycle to bust in the business cycle. Author Affiliation: (a) Georg-August University Göttingen, Germany (b) German Council of Economic Experts, Germany (c) Monash University, Australia * Corresponding author. Article History: Received 30 October 2021; Revised 17 January 2022; Accepted 21 January 2022 (footnote) This paper reflects the personal views of the authors and not necessarily those of the German Council of Economic Experts. A previous version of this paper was circulated titled 'Financial Factors and the Business Cycle'. We thank an anonymous referee, Francesco Furlanetto, Lutz Kilian, Mariano Kulish, James Morley, Anh D.M. Nguyen, Adrian Pagan, Hélène Rey, and James Yetman, and participants of seminars and conferences for comments and helpful discussions. We also thank Abby Nguyen for providing excellent research assistance. This research was supported by the Australia-Germany Joint Research Co-operation Scheme initiative of Universities Australia and the German Academic Exchange Service (DAAD). Benjamin Wong also acknowledges funding support from the Australian Research Council (DP190100202 and DE200100693). All remaining errors are ours. Byline: Tino Berger [tino.berger@wiwi.uni-goettingen.de] (a), Julia Richter [julia.richter@svr-wirtschaft.de] (a,b), Benjamin Wong [benjamin.wong@monash.edu] (*,c)

Keywords Monetary policy rules; Exchange rate management; Time-Varying risk premium; Welfare Abstract We show that a monetary policy rule that uses the exchange rate to stabilize the economy can outperform a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the paths of the nominal exchange rate and the interest rate under each rule and (ii) external habits in consumption, which leads to deviations from uncovered interest parity. These differences are larger in economies, which are very open, which are more exposed to foreign shocks, or in which domestic and foreign goods are highly substitutable. Author Affiliation: (a) Columbia University, Department of Economics. 3022 Broadway New York, NY 10027, United States (b) INSEAD, CEPR and ABFER, Economics Department, 1 Ayer Rajah Avenue, Singapore, 138678, Singapore (c) Federal Reserve Bank of St. Louis, Research Division, 1 Federal Reserve Bank Plaza, St. Louis, MO 63102, United States * Corresponding author. Article History: Received 7 December 2020; Revised 11 January 2022; Accepted 16 January 2022 (footnote)[white star] This paper previously circulated under the title 'The Exchange Rate as the Instrument of Monetary Policy.' The authors would like to thank Thomas Lubik and two anonymous referees for very helpful suggestions. We are also grateful to Florin Bilbiie, Antonio Fatas, Federico Gavazzoni, Pierre-Olivier Gourinchas, Romain Ranciére, Gilles Saint-Paul, Daniele Siena, Jaume Ventura and participants of the seminars at the Federal Reserve Bank of St. Louis, Georgetown University, Banque de France, Paris School of Economics, INSEAD, the 2013 Society for Economic Dynamics, the National University of Singapore, Singapore Management University, the Swiss National Bank, the 8th Dynare Conference in Zurich, and the Universitat de Valencia for helpful comments. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System. Byline: Jonas Heipertz [jonas.heipertz@gmail.com] (a), Ilian Mihov [ilian.mihov@insead.edu] (b), Ana Maria Santacreu [am.santacreu@gmail.com] (*,c)

Keywords Structural vector autoregression; Local projection; Impulse responses; Instrumental variable Abstract Different local projection (LP) estimators for structural impulse responses of proxy vector autoregressions are reviewed and compared algebraically and with respect to their small sample suitability for inference. Conditions for numerical equivalence and similarities of some estimators are provided. Two generalized least squares (GLS) projection estimators are found to be more accurate than the other LP estimators in small samples. In particular, a lag-augmented GLS estimator tends to be superior to its competitors and to perform as well as a standard VAR estimator for sufficiently large samples. Author Affiliation: (a) School of Economics, University of East Anglia, Norwich Research Park, Norwich NR4 7TJ, United Kingdom (b) DIW Berlin and Freie Universität Berlin, Mohrenstr. 58, Berlin 10117, Germany * Corresponding author. Article History: Received 27 May 2021; Revised 30 September 2021; Accepted 15 November 2021 (footnote)1 We thank Jörg Breitung, Ralf Brüggemann, Dake Li, Mikkel Plagborg-Møller, Christian Wolf, Ke-Li Xu, Amaze Lusompa and two anonymous referees for helpful comments on an earlier version of this paper. The paper was presented at the X I t Workshop in Time Series Econometrics, the International Association for Applied Econometrics Annual Conference, the European Meeting of the Econometric Society, and at University of East Anglia School of Economics internal seminars. We thank the participants for helpful comments. Byline: Martin Bruns [martin.bruns@uea.ac.uk] (a,1,*), Helmut Lütkepohl [hluetkepohl@diw.de] (b)

Keywords Industry growth; Inflation anchoring; Inflation forecasts; Credit constraints; Difference-in-differences; Central bank independence Abstract Can inflation anchoring foster growth? To answer this question, we use panel data on sectoral growth for 22 manufacturing industries from 39 advanced and emerging market economies over 1990--2014 and employ a difference-in-differences strategy based on the theoretical prediction that higher inflation uncertainty particularly depresses investment in industries that are more credit constrained. Industries characterized by high external financial dependence, liquidity needs, and R&D intensity, and low asset tangibility, tend to grow faster in countries with well-anchored inflation expectations. The results, based on an IV approach--using indicators of monetary policy transparency and central bank independence as instruments--confirm our findings. Author Affiliation: (a) School of Economics, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 03722, South Korea (b) International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA Article History: Received 21 April 2021; Revised 18 October 2021; Accepted 17 November 2021 (footnote) Comments from the editor and two anonymous referees substantially improved the paper. We are also grateful to Noh-Sun Kwark (discussant), Nick Bloom, Sinem Kilic Celik, Yuriy Gorodnichenko, Joon-Ho Hahm, Raja Junankar, Jun Il Kim, Ksenia Koloskova, Keith Kuester, Jae Won Lee, Grace Bin Li, Marc Schiffbauer, Chansik Yoon, Bok-Keun Yu, Carlos Vegh, Guillermo Vuletin, Tim Willems, and the seminar participants at the Bank of Korea and the Korea Money and Finance Association Annual International Conference for their feedback. Jeeyeon Phi, Junhyeok Shin, and Seung Yong Yoo provided excellent research assistance. This paper was supported in part through a research project on macroeconomic policy in low-income countries with the U.K.'s Department for International Development (DFID). This research was (in part) supported by the Yonsei Signature Research Cluster Program of 2021 (2021--22--0011). The views expressed in this paper are those of the authors and should not be reported as representing the views of the IMF or DFID. Any remaining errors are the authors' sole responsibility. Byline: Sangyup Choi [sangyupchoi@yonsei.ac.kr] (a), Davide Furceri [dfurceri@imf.org] (b), Prakash Loungani [ploungani@imf.org] (b), Myungkyu Shim [myungkyushim@yonsei.ac.kr] (a)

Keywords Shilnikov chaos; Global indeterminacy; Long-term un-predictability; Liquidity trap Abstract The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, à la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial 'loanable funds' over-saving theory, which seeks to explain why interest rates and, to a lesser extent, inflation rates have declined to current low levels, such that the real rate of interest may be below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Our results are robust to whether money is in the production function, in the utility function, or not in the model at all. But our results do depend upon the existence of sticky prices. Author Affiliation: (a) University of Kansas, Lawrence, and Center for Financial Stability, New York City, USA (b) University of Cagliari, Italy (c) Indira Gandhi Institute of Development Research, Mumbai, India (d) University of Cagliari, Italy (e) University of Cagliari, Italy * Corresponding author. Article History: Received 15 November 2020; Revised 12 November 2021; Accepted 27 November 2021 (footnote) We have benefited from comments by Jess Benhabib, Andrey Shilnikov, Jean-Bernard Chatelain, Nikolay Kuznetsov, John Ralston, Milena Stanislavova, and Weishi Liu. Byline: William A. Barnett [barnett@ku.edu] (a,*), Giovanni Bella [bella@unica.it] (b), Taniya Ghosh [taniya@igidr.ac.in] (c), Paolo Mattana [mattana@unica.it] (d), Beatrice Venturi [venturi@unica.it] (e)

Keywords Occupational choice; Self-employment; Own-account workers; Financial intermediation Abstract This paper explores how financial intermediation costs affect occupational choices, using a model with employers, own-account workers, and wage workers. An intermediation cost drives a wedge between the return on saving and the cost of borrowing that increases the cost of borrowing, reduces the return on saving, and depresses the wage rate. As a novel channel in this paper, a lower return on saving induces agents to seek self-employment to manage their wealth. Quantitatively, the observed variation in the intermediation cost explains about a quarter of cross-country differences in the share of own-account workers. In terms of policy implications, these findings suggest that governments should increase the efficiency of financial intermediation and provide households with better saving opportunities. Author Affiliation: Institute for Economic and Social Research Jinan University, 113A Zhonghui Building, 601 Huangpu West Avenue, Guangzhou 510630, China Article History: Received 17 February 2021; Revised 14 September 2021; Accepted 16 September 2021 (footnote)[white star] This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Byline: Jiajia Gu [gu.jia.jia@outlook.com]

Keywords Social security; Funding; Pay-as-you-go; Asset capture; Majority vote; Welfare Abstract We analyze the political stability of funded social security. Using a stylized theoretical framework we study the mechanisms behind governments capturing social security assets in order to lower current taxes. The results and the driving mechanisms carry over to a fully-fledged and carefully calibrated overlapping generations model with an aging population. Funding is efficient in a Kaldor-Hicks sense. We demonstrate that, even though we can rationalize the actual introduction of a two-pillar defined-contribution scheme with funding through a majority vote, a new vote to curtail the funded pillar through asset capture or permanent diversion of contributions to the pay-as-you-go pillar always receives majority support. For those alive and thus allowed to vote, the temporary reduction in taxes outweighs the reduction in retirement benefits. This result is robust to substantial intra-cohort heterogeneity and other extensions, and only overturned with a sufficient degree of altruism. Our analysis rationalizes the experience of Central and Eastern European countries, who rolled back their funded pension pillars soon after setting them up. Author Affiliation: (a) University of Amsterdam, Copenhagen Business School, European Fiscal Board, CEPR, CESifo and Tinbergen Institute, Netherlands (b) FAME|GRAPE, SGH Warsaw School of Economics, Poland (c) FAME|GRAPE, University of Warsaw and IZA, Poland * Corresponding author. Article History: Received 23 July 2021; Accepted 20 September 2021 (footnote)[white star] We thank an anonymous referee for thoughtful comments on the paper. Thomas Apolte, Monika Bütler, Damiaan Chen, Nicoleta Ciurila, Hans Fehr, Vincenzo Galasso, Christian Geppert, Nezih Guner, Ward Romp, Jan-Egbert Sturm and participants in a Netspar Workshop, the Netspar International Pension Day, the Royal Economic Society Annual Meeting and the European Public Choice Society Annual Meeting all provided very helpful comments on an earlier version of this paper. We are also grateful for remarks from participants of seminars at the National Bank of Poland, GRAPE, the University of Warsaw and the Warsaw School of Economics. The authors are grateful for research assistance to Marcin Bielecki and Magda Malec, whose work was supported within National Science Center grant # 2012/01/D/HS4/04039. The authors' work was kindly supported by National Science Center grant # 2014/13/B/HS4/03264. All opinions expressed are those of the authors and do not necessarily coincide with those of the National Science Center, the European Fiscal Board or any other institution they are affiliated with. Any remaining errors are ours. Byline: Roel Beetsma [r.m.w.j.beetsma@uva.nl] (*,a), Oliwia Komada [o.komada@grape.org.pl] (b), Krzysztof Makarski [k.makarski@grape.org.pl] (b), Joanna Tyrowicz [j.tyrowicz@grape.org.pl] (c)

Keywords Monetary Policy; Monetary Unions; Zero Lower Bound; Inflation Targets; Behavioral Macroeconomics Abstract In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) may even lead to an enlarged fiscal space, i.e. a lower debt-to-GDP ratio if the risk premium's reaction to a higher inflation target is not too large. Author Affiliation: (a) Otto-Friedrich-Universität Bamberg, Germany (b) Centre for Applied Macroeconomic Analysis, Australian National University, Australia * Corresponding author. Tel.: +491725273946. Article History: Received 14 September 2020; Revised 17 August 2021; Accepted 5 September 2021 (footnote)1 We would like to thank Michael Roos, Lena Dräger, Ulrich Fritsche, Joep Lustenhouwer, Emanuel Gasteiger and Sandra Niemeier, the Associate Editor and the referees for helpful comments and suggestions on previous drafts of this paper, as well as Berit Rohde for excellent research assistance. Byline: Christian R. Proaño [christian.proano@uni-bamberg.de] (*,1,a,b), Benjamin Lojak (a)

Keywords Spinouts; Learning; Occupational choice; Firm dynamics; Management practices Abstract Most new firms are founded by former employees of existing firms -- spinouts. This paper explores how existing firms shape the entry and post-entry dynamics of spinouts and studies the aggregate implications of this relationship. Using micro-data from Mexico, I show that employees from small firms are more likely to form spinouts than employees of large firms. In addition, spinouts from large employers start at a larger scale and grow faster than spinouts from small employers. To reconcile these patterns, I develop a model of occupational choice and firm dynamics in which employees can learn from their employers. Using a calibrated version of the model, I analyze the implications of the link between employer size and spinout dynamics for macroeconomic outcomes within and across economies. I argue that learning efficiency -- interpreted as management quality -- is not only salient for understanding cross-country differences in spinout entry but also variation in the firm size distribution and output per worker. I also show that employee learning has meaningful and long-lasting implications for the creation of new firms and for workers in response to policies that target existing firms. Taken together, this paper establishes a connection between incumbent and entrant firms and shows that it is important for aggregate outcomes. Author Affiliation: Department of Economics, University of Melbourne, Australia * Corresponding author. Article History: Received 8 October 2021; Accepted 20 October 2021 (footnote)[white star] I have benefited from the comments and suggestions of many people who have discussed this work with me, as well as the kind attention of a number of seminar audiences. I am particularly grateful to my dissertation advisor, Yongseok Shin, as well as Salomé Baslandze, Paco Buera, Chris Edmond, Alexander Monge-Naranjo, Markus Posckhe, Lin Shao, and Lawrence Uren. Earlier versions of this paper circulated under the title 'Employer Size and Spinout Dynamics'. Byline: Faisal Sohail [faisal.sohail@unimelb.edu.au] (*)

Keywords Legal form of organization; Business tax; Capital misallocation Abstract Using a dynamic stochastic occupational choice model with heterogeneous firms, this paper studies a sweeping business tax-cut program enacted in the State of Kansas during 2012--2016. This paper finds that 'The Kansas Tax Experiment' distorts entrepreneurial choice of legal form of organization (LFO), and encourages the adoption of the pass-through status over the C-corporate legal form. Because pass-through businesses face more constraints on access-to-capital, the policy reduces aggregate productive efficiency and leads to declines in output, capital formation, and employment growth. This article highlights the importance of considering LFO choice when making a business tax policy change. Author Affiliation: (a) Economics Department, William and Mary, P.O. Box 8795, Williamsburg, VA 23187, USA (b) Emeritus of Florida State University, Tallahassee, FL 32306, USA * Corresponding author. Article History: Received 31 March 2021; Revised 21 October 2021; Accepted 22 October 2021 (footnote)[white star] Much of this research occurred while Schlagenhauf was a Research Economist at the Federal Reserve Bank of St Louis. We acknowledge that the Federal Reserve Bank financed the data acquisition from the State of Kansas. The views expressed in this article are those of the authors. They do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Any errors are solely our own. Byline: Shi Qi [sqi01@wm.edu] (*,a), Don Schlagenhauf [dschlagenhauf@fsu.edu] (b)

Keywords Optimal fiscal policy; Distortionary taxes; Government investment; Interest rate; Safe rate; Risky rate; Secular stagnation Abstract This paper analyzes optimal fiscal policy when the rate at which governments can borrow changes persistently. To analyze trade-offs, we allow for fiscal distortions and productive government spending and characterize the optimal mix between spending and revenue measures in a low rate environment. We find that low interest rates on government bonds can be welfare-enhancing if used by the government for fiscal measures that reduce the level of distortion, notably the labor tax, permanently. In the case of a general 'flight-to-quality', where households ask for a premium for holding physical (private) capital, the optimal policy is to increase the public-to-private capital ratio for as long as the shock persists. The associated financing needs should be met by a small increase in government debt and a temporary capital tax. Author Affiliation: (a) DG ECFIN, European Commission, Belgium (b) DIW, EIIW, Germany, and VIVES, KU Leuven, Belgium (c) IRES, UC Louvain, Belgium * Corresponding author. (footnote) We thank Guenter Coenen, Thomas Lubik and participants at the conference on 'Secular Stagnation, Low Interest Rates and Low Inflation: Causes and Implications for Policy' organized by the European Commission, the CEPR and the JEDC for very helpful comments and suggestions. The views expressed in this paper are those of the authors and should not be attributed to the European Commission. Byline: Philipp Pfeiffer (a), Werner Roeger [w.roeger@web.de] (b,*), Lukas Vogel (a,c)

Keywords Bank profitability; Interest flows; Non-interest flows; Deposits; Leverage Abstract Faced with a potential zero lower bound on deposit interest rates, how do banks pass on the fall in net interest income due to negative interest rates? This paper aims to investigate the different channels of banks' responses to negative interest rates using a detailed breakdown of the profit and loss account of 3637 banks in 59 countries from 2011 to 2018. We find that the decrease in interest income due to negative interest rates is mitigated by an increase in non-interest income, but only partially. We find that banks respond to that shock by reducing the interest paid on non-customer deposit liabilities and their personnel expenses. We also show that banks' responses are not instantaneous and that they adjust their response as negative interest rates persist over time such that how long negative interest rates are implemented matters. Finally, our results suggest that large banks with higher deposits and higher leverage ratios are the most affected by the implementation of negative interest rates. Author Affiliation: (a) PSB Paris School of Business, 59 rue Nationale, Paris 75013, France (b) Banque de France, 31 rue Croix des Petits Champs, Paris 75001, France (c) Sciences Po - OFCE, 10 place de Catalogne, Paris 75014, France * Corresponding author. Article History: Received 28 July 2020; Revised 6 August 2021; Accepted 17 August 2021 (footnote) We thank two anonymous referees as well as Christophe Blot and Jérôme Creel for helpful comments and discussions. Any remaining errors are ours. The views expressed in this paper do not necessarily reflect those of Banque de France. Byline: Whelsy Boungou [boungouwhelsy@yahoo.com] (a,*), Paul Hubert [paul.hubert@sciencespo.fr] (b,c)

Keywords Dynamic oligopoly; Growing market; Market share decay; Lanchester model; Cooperative advertising Abstract A finite-horizon Lanchester model of a (continuous-time) differential game of oligopolistic advertising is considered, and the analytical form of the unique closed-loop Nash equilibrium derived and analyzed. In contrast to previous research, the finite-horizon Lanchester model is modified to include two novel factors. First, a growing market allows us to analyze the competition for a potential market via generic advertising, with the latter giving the otherwise zero-sum-like game a public good dimension. Second, it is assumed that each firm's market share declines in the absence of advertising efforts. The analysis investigates the Markovian (closed-loop) equilibrium calling for firms operating in a competitive growing market to invest in offensive, defensive or generic advertising in all or part of the decision horizon. In the most novel part of the paper, the non-cooperative outcome is compared to the Pareto-optimal or cooperative solution. The conclusions derived reveal significant differences in the resulting patterns of co-existence of the different dimensions of advertising over time, relative to the existing literature. Author Affiliation: (a) Department of Economics, University of Iowa, Iowa City, IA 52242, Iowa (b) Department of Econometrics, Faculty of Economics and Sociology, University of Lódz, Poland (c) ESCP Europe, 79. av. de la République, 75543 Paris Cedex 11, France * Corresponding author. Article History: Received 3 November 2020; Revised 3 August 2021; Accepted 22 August 2021 (footnote)[white star] The authors are grateful to Raouf Boucekkine, Joana Resende and three anonymous referees of this Journal for helpful feedback on the contents of this paper. Byline: Rabah Amir [rabah-amir@uiowa.edu] (*,a), Dominika Machowska [dominika.machowska@uni.lodz.pl] (b), Michael Troege [troege@escpeurope.eu] (c)

Keywords Long-term inflation expectations; Monetary policy; Re-anchoring channel; Structural VAR; Structural scenario analysis Abstract This paper investigates the role of long-term inflation expectations for the monetary transmission mechanism and the conduct of monetary policy in a structural VAR framework. In contrast to earlier studies, we find that U.S. long-term inflation expectations respond significantly to a monetary policy shock. In line with a re-anchoring channel of monetary policy, long-term inflation expectations play an important role for the transmission of monetary policy shocks to the rate of inflation. Structural scenario analysis suggests that the response of monetary policy to expectations shocks contributes to the stabilization of inflation and unemployment. Author Affiliation: Department of Economics, Freie Universität Berlin, Boltzmannstr.20, Berlin D-14195, Germany * Corresponding author. Article History: Received 26 January 2021; Revised 12 July 2021; Accepted 14 July 2021 (footnote)[white star] This work was supported by the Deutsche Forschungsgesellschaft through grant NA 365/6-1 (The Anchoring of Inflation Expectations). We thank Jörg Breitung, Helmut Lütkepohl, Frank Schorfheide and two anonymous referees for very helpful comments and suggestions. A previous version of this paper was circulated under the title 'The Role of Long-Term Inflation Expectations for the Transmission of Monetary Policy Shocks'. Byline: Max Diegel [max.diegel@fu-berlin.de] (*), Dieter Nautz

Keywords DSGE-DFM; Forecasting; Open-economy macroeconomics; Exchange rates Abstract This paper examines the inferences and forecasting benefits that can be made when one incorporates a large quantity of economic time series into international structural macroeconomic models. I estimate a close variation of Adolfson et al. (2007a, 2008) small open-economy dynamic stochastic general equilibrium (DSGE) model in a data-rich environment and evaluate its predictive performance of the Canadian macroeconomy. The data set I use in the paper includes Canadian, American, Asian and European macro-financial data. I compare the forecasting performance of the DSGE model estimated in a data-rich environment (DSGE-DFM) to the forecasts generated by the DSGE model estimated in its traditional fashion and forecasts generated by other reduced form forecasting models. I find that an open-economy DSGE model estimated in a data-rich environment significantly out performs its regularly estimated DSGE counterpart. Further, DSGE-DFM forecasts that incorporate real-time data are similar or better to the Bank of Canada's Staff Economic Projections for GDP, consumption, investment, and trade statistics. In addition, the DSGE-DFM model of this paper is useful in forecasting both the real and nominal exchange rate in the short and medium-term. Author Affiliation: Bentley University, Waltham, MA, USA * Corresponding author. Article History: Received 29 May 2020; Revised 13 April 2021; Accepted 15 June 2021 Byline: Sacha Gelfer [sgelfer@bentley.edu] (*)

Keywords Optimal Taxation; Tax Administration; Fiscal Policy; Heterogeneous Agents Abstract How does the presence of endogenous tax compliance alter optimal taxation in the United States? Using a full-scale macroeconomic model augmented with endogenous tax avoidance, I show that extremely high marginal tax rates for top earners cannot be sustained in equilibrium. Revenue- and welfare-maximising tax rates range between 36.4% and 38.4% in the long run, which are very close to the status quo. These results are robust to the calibration of the labour supply's Frisch elasticity, and the labour response explains, at most, 60% of the variation of taxable income in the short run. Moreover, tax hikes on top earners are not effective redistribution mechanisms in the presence of tax avoidance. Author Affiliation: School of Economics, Universidad San Francisco de Quito, Ecuador * Tel.: +593 297 1700 ext. 1445. Article History: Received 17 December 2020; Revised 23 June 2021; Accepted 24 June 2021 (footnote)[white star] This paper is based on the first chapter of my PhD dissertation entitled Essays on Fiscal Policy and Incomplete Markets submitted at Queen Mary, University of London. Earlier versions of this paper were distributed with the following titles: Tax Avoidance and the Elasticity of Taxable Income: A Macroeconomic Perspective, Down the Rabbit-Hole: Tax Avoidance and the Elasticity of Taxable Income and Endogenous Taxpayers and the Elasticity of Taxable Income. None of these versions has been published before. Declarations of Interest: none. Byline: Carlos Uribe-Terán [cauribe@usfq.edu.ec] (*)

Keywords Forward-looking agents; Spatial dynamic panel data model; Endogenous networks; Euler equations; GMM Estimation; U.s. states' public welfare expenditure Abstract This paper introduces a spatial panel data model describing local agents' intertemporal decision-making with their network interactions and network evolution. Our model's purpose is to give a tool to analyze local governments' behaviors when there exist network interactions among them with endogenously changing networks. To provide a theoretical foundation of our model, we establish a network interaction model for forward-looking agents. An agent's current action can affect his future network links via time-varying economic indicators. To estimate the model's parameters, we consider a GMM estimation method based on first-order conditions of agents' approximated lifetime problems. Asymptotic properties of the GMM estimator are studied for statistical inferences. Using our model, we find evidence of positive spillovers among U.S. states' public welfare expenditures with coevolution between them and spatial-economic networks. Author Affiliation: Department of Economics, The Ohio State University, 1945 N. High Street,Columbus, Ohio * Corresponding author. Article History: Received 13 October 2020; Revised 25 April 2021; Accepted 18 June 2021 (footnote)[white star] We thank Thomas A. Lubik (Editor) and anonymous referees for their great suggestions that substantially improve our paper. We would like to thank Professors Jason Blevins, Chi-Young Choi, Stephen Cosslett, Adam Dearing, Robert de Jong, Chih-Sheng Hsieh, Fei Jin, Yongcheol Shin, Bruce Weinberg, and Huanxing Yang for their valuable comments and suggestions. Hanbat thanks his graduate colleagues Jinsoo Bae, Minhae Kim, Nayul Kim, Sungjoon Kwon, Soyoung Lee, and Jon Michel. Also, we thank seminar participants at National Taiwan University and the audience from the 2019 Asian Meeting in Xiamen University, Xiamen, China; the 2019 North American Summer Meeting in University of Washington, Seattle; U.S, the 2019 European Summer Meeting in University of Manchester, U.K; and the 29th Annual Meeting of the Midwest Econometrics Group at the Ohio State University for comments. Byline: Hanbat Jeong [jeong.181@osu.edu] (*,a), Lung-fei Lee [lee.1777@osu.edu] (a)

Keywords Exchange rates; Unconventional monetary policies; Structural breaks; Economic fundamentals; General-to-specific approach; Partial cointegrated vector autoregressive models Abstract We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate over a recent period characterised by structural breaks and policy regime shifts. The paper models both long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly reflect quantitative monetary policy and the influence of a forward exchange market. Out-of-sample forecasts comparing the model with economic fundamentals to benchmarks including the random walk indicate that fundamentals can help at short horizons but less so at longer horizons. Author Affiliation: (a) Magdalen College and Climate Econometrics, University of Oxford, UK (b) Faculty of Economics, Fukuoka University, Japan * Corresponding author. Article History: Received 3 August 2020; Revised 13 April 2021; Accepted 15 April 2021 (footnote)1 We are grateful to David F. Hendry, Bent Nielsen, and two anonymous referees for their invaluable comments on the manuscript of this paper. This paper was presented at the 21st Dynamic Econometrics Conference (Washington DC, US), the Workshop on Recent Progress in Time Series: in honour of Peter Robinson (Sendai, Japan), International Conference on Research in Economics and Social Science (Shiga, Japan) and the 2020 Japanese Economic Association (JEA) Spring Meeting (Online Meeting, Fukuoka, Japan). We appreciate constructive comments and suggestions provided by the participants at these conferences; in particular, T Kurita is grateful to Shugo Yamamoto for being the discussant at the JEA meeting. T. Kurita gratefully acknowledges financial support from JSPS KAKENHI (Grant Numbers: 26380349 and 15KK0141) for this work. Byline: Jennifer L. Castle [jennifer.castle@magd.ox.ac.uk] (a,*), Takamitsu Kurita [tkurita@fukuoka-u.ac.jp] (b,1)

Keywords Identification-robust test; New Keynesian model; Numerical projection; Test inversion Abstract This paper introduces Particle Swarm Optimization [PSO] to econometrics with focus on projection-based test inversion. Econometricians have developed such methods to enable a robust analysis of imperfectly identified models. Despite important theoretical breakthroughs, computational and numerical tool kits have not followed suit. This paper compares stochastic solvers including PSO on speed and accuracy for the problem. Empirically, the paper analyzes a three-equation New Keynesian model for the U.S.. Results are confirmed via a synthetic sample with relevant and weak instruments. In contrast to PSO, we find that popular solvers may converge to local optima suggesting misleading decisions on the nature of the New Keynesian Phillips Curve, determinacy of monetary policies, and the persistence of the Taylor rule. Results confirm that far more attention needs to be paid to numerical precision as test inversion duly gains popularity in applied econometrics. Author Affiliation: (a) Department of Economics, Carleton University, Canada (b) School of Economics, University of Nottingham Ningbo China, China * Corresponding author. Article History: Received 6 April 2020; Revised 13 April 2021; Accepted 15 April 2021 (footnote)[white star] This work was supported by the Institut de Finance Mathématique de Montréal [IFM2], the Social Sciences and Humanities Research Council of Canada, and the Fonds FQRSC (Government of Québec). Byline: Lynda Khalaf [lyndakhalaf@cunet.carleton.ca] (*,a), Zhenjiang Lin [zhenjiang.lin@nottingham.edu.cn] (b)