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We investigate conditions under which a government facing a large set of small private agents can implement its desired outcome when it has only a limited commitment ability to policy actions. We show that, in static contexts, more commitment ability always improves equilibrium outcomes and, in some widely used macro models, an arbitrarily small commitment ability suffices to implement a unique outcome. This contrasts with repeated settings where reputation forces make necessary a more substantial commit- ment ability to obtain a unique outcome and, paradoxically, more commitment ability may lead to worse outcomes and/or to a wider set of equilibria. We derive implications for models of bailouts, inflation bias, and capital taxation.

This paper studies how a crisis that induces a large negative fiscal shock and a strong demand for safe stores of value affects the independence of a central bank vis-a-vis a fiscal authority that seeks to inflate away public liabilities. We find that the central bank can maintain price stability only if there is a large demand for its liabilities, so that it can control the net increase in government debt held by the private sector. We show that fiscal requirements are necessary even with low interest rates and massive reserve issuance is not necessarily a sign of fiscal dominance.

This paper assesses the effect on banks’ lending activity of accepting illiquid collateral at the central bank refinancing facility in times of wholesale funding stress. We exploit original data on the loans granted by the 177 largest euro area banks between 2011m1 and 2014m12 and on the composition of their pool of collateral pledged with the Eurosystem. During this period, two-thirds of the banks in our sample experienced a sizable loss of wholesale funding. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem reduced their lending to non-financial firms and households less : a one standard deviation increase in the volume of illiquid collateral pledged corresponded to a 1.1 % increase in loans to the economy. This result holds for banks that were and were not run. Our finding thus suggests that the broad range of collateral eligible in the euro area may have helped to mitigate the credit crunch during the euro debt crisis., Barthélemy Jean, Bignon Vincent, Nguyen Benoît. Monetary policy, illiquid collateral and bank lending during the European sovereign debt crisis. In: Economie et Statistique / Economics and Statistics, n°494-496, 2017. The Crisis, Ten Years After. pp. 111-130.

We estimate a medium-scale dynamic stochastic general equilibrium (DSGE) model for the euro area in an open-economy framework. The model includes structural trends on all variables, allowing us to estimate on gross data. First, we provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data. Hence, we can properly deal with persistent deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro-area imports during the last 10 years on domestic inflation. From 2000Q1 to 2008Q4, we estimate the contribution of the imbalanced development of international trade on euro-area inflation to an average of −0.7%, and on nominal interest rate, to an average of −1.4%.

This paper determines conditions for the existence of a unique rational expectations equilibrium—determinacy—in a monetary policy switching economy. We depart from the existing literature by providing such conditions considering all bounded equilibria. We then apply these conditions to a new Keynesian model with switching Taylor rules. First, deviation from the Taylor principle in one regime does not necessarily cause indeterminacy. Second, very different responses to inflation may trigger indeterminacy even if both regimes satisfy the Taylor principle. Determinacy thus results from the adequacy between monetary regimes rather than the determinacy of each of them taken in isolation. Markov‐switching indeterminacy monetary policy E31 E43 E52

With the European debt crisis, the role of assets accepted by the Eurosystem as collateral for refinancing operations took on a new place in the public debate, as, against a backdrop of shifting demand for refinancing, movements in European bond prices led to significant fluctuations in the collateral constraints of credit institutions. This paper documents the change in and heterogeneity of these constraints. We assess the impact attributable to the downgrade of sovereign ratings and the decline in asset prices during the European debt crisis on the valuation of collateral available for refinancing. We also construct indicators that track the change in the quality and liquidity of posted collateral. Our findings suggest that the flexibility of the Eurosystem collateral framework enabled credit institutions to cushion the shock created by the European debt crisis by depositing assets that were less liquid than bonds without causing a relative deterioration in the average rating of assets posted as collateral compared with the average rating on the market, as measured by eligible marketable assets.

We assess the effect of accepting illiquid assets as collateral at the central bank on banks’ lending activity. We study the lending activity of the 177 largest banks in the Euro area between 2011m1 and 2014m12 and the composition of their pool of collateral pledged with the Eurosystem. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem increased their lending to non-financial firms and households: a one standard deviation increase in the volume of illiquid collateral increase lending by 0.6%.

This paper revisits the ability of central banks to manage private sector's expectations depending on its credibility and how this affects the use of interest rate rules and pegs to achieve monetary policy objectives. When private agents can only provide limited incentives for the central bank to follow a policy, we show that resulting limited credibility allows a central bank to prevents the inflation from diverging by defaulting on past promises if necessary. As a result, the Taylor rule, when expected, anchors inflation expectations on a unique equilibrium path as long as the Taylor principle is satisfied. Finally, we also show that limited credibility restricts the impact of long-term interest rate pegs, so as to make current conditions less dependent on future policy changes.

This paper solves rational expectations models in which structural parameters switch across multiple regimes according to state-dependent (endogenous) transition probabilities. Assuming small shocks and smooth transition probabilities, we apply a perturbation approach. We first provide for conditions under which a unique bounded equilibrium exists. We then compute first- and second-order approximations. In a new-Keynesian model with monetary policy switching, we document new effects of monetary policy switching when transition probabilities depend on inflation.

This paper documents business cycles' fluctuations in Chinese provinces. China's de facto federalism, within a context of great geographical and economic diversity, suggests the great importance of policy coordination between provinces. We investigate the role of various potential determinants of provincial business cycles' synchronization. We consider exogenous factors like distance and size as well as policy factors such as industrial, fiscal and trade policy. Results emphasize the benefits of domestic trade and local fiscal policy rationalization on the stabilization of output fluctuations. However, they also identify international trade and local economic policy heterogeneity as growing centrifugal forces.• JEL Classification: E32, F41, E63

Cette étude mesure l’impact de l’augmentation des écarts entre les taux souverains européens sur les coûts de financement bancaire et obligataire ainsi que sur les swaps de défaut de crédit bancaires et non bancaires. L’analyse porte sur les trois plus grandes économies de la zone euro (hors Allemagne, considérée ici comme la référence) : Espagne, France et Italie. Les écarts entre les taux souverains influencent fortement et significativement les taux des nouveaux crédits aux sociétés non financières (SNF) et ceux des nouveaux crédits immobiliers à court comme à long terme. De même, ils se propagent aux taux des obligations d’entreprises non financières notées BBB. Ainsi, les évolutions récentes des taux des crédits aux SNF, des obligations des entreprises notées BBB et des crédits immobiliers peuvent être attribuées pratiquement dans leur totalité à l’évolution concomitante des écarts de taux souverains. De même, ces estimations suggèrent une propagation forte mais partielle des écarts entre les taux souverains vers les swaps de défaut de crédit des SNF et des entreprises bancaires. Les swaps de défaut des crédits bancaires français sont les plus affectés par les écarts de taux souverains. Finalement, près de la moitié des écarts des swaps de défaut des crédits bancaires (par rapport à leurs équivalents allemands) peuvent être expliqués par les écarts entre les taux souverains. Ces résultats suggèrent une forte relation entre les taux auxquels se financent les États d’une part, les entreprises et les ménages d’autre part.

Dans ce papier, nous énonçons les conditions de détermination, c'est-à-dire les conditions assurant l'existence et l'unicité d'une solution bornée, dans les modèles linéaires, à anticipations rationnelles, tournées vers le futur et incorporant des changements de régime. Nous mettons ainsi un terme au débat entre Davig et Leeper (2007) et Farmer et al. (2010). Les conditions de détermination dérivées par les premiers sont uniquement valides dans le sous-espace des solutions bornées ne dépendant que d'un nombre ni de régimes passés, que nous appelons markoviennes. Dans l'espace des solutions bornées, les nouvelles conditions de détermination que nous dérivons sont plus restrictives. Néanmoins, lorsqu'elle est unique, la solution coïncide avec la solution markovienne de Davig et Leeper (2007). Finalement, nous illustrons nos résultats dans un modèle néo-keynesien standard étudié dans les deux articles sus-cités.

In this chapter, we present theoretical foundations of main methods solving rational expectations models with a special focus on perturbation approaches. We restrict our attention to models with a finite number of state variables. We first give some insights on the solution methods for linear models. Second, we show how to use the perturbation approach for solving non-linear models. We then document the limits of this approach. The perturbation approach, while it is the most common solution method in the macroeconomic literature, is inappropriate in a context of large fluctuations (large shocks or regime switching) and of strong non-linearities (e.g. occasionally binding constraints). The former case is then illustrated extensively by studying regime switching models. We also illustrate the latter case by studying existing methods for solving rational expectations models under the Zero Lower Bound constraint, i.e. the condition of non negativity of the nominal interest rate. Finally, we end up with a brief presentation of global methods which are alternatives when the perturbation approach fails in solving models.

In this paper, we solve a large class of non-linear rational expectations models with regime switching, i.e. recurring shifts in parameters. The regime-switches and the shocks may follow state-dependent probability distributions. Using a perturbation approach, we first prove that sufficient conditions ensuring the existence of a unique stable equilibrium follow from the corresponding conditions in a regime-switching model with state-independent probabilities. Second, we provide first and second order Taylor expansions of the solution in subclasses of models. Third, we show that state-dependence modifies solution at first-order if the steady-state differs across regimes, otherwise, it only modifies higher orders. Finally, we illustrate our results with a Fisherian model of inflation determination and a New-Keynesian model in which monetary policy switches endogenously between a less-active (dovish) and a more-active (hawkish) reaction against inflation. These examples highlight that the state-dependent fluctuations of transition probabilities can substantially alter the equilibrium dynamics through economic agents' expectations.

The current financial crisis has revived the interest for monitoring both monetary and credit developments. Over the past two decades, consistent with the adoption of inflation targeting strategies by a growing number of central banks and the development of New Keynesian models for which monetary aggregates are largely irrelevant, money and credit have been progressively neglected in the conduct of monetary policy. A striking exception has been the Eurosystem, which has implemented a strategy known as the “two-pillar monetary policy strategy” giving a prominent role for money. In this paper, we develop a small optimizing model based on Ireland (2004), estimated on euro area data and featuring this two-pillar strategy. We evaluate an ECB-style cross-checking policy rule in a DSGE model with real balance effects of money. We find some evidence that indeed money plays a non-trivial role in explaining the euro area business cycle. This provides a rationale for the central bank to factor in monetary developments but also raises some issues regarding the reliability of M3 as an appropriate monetary indicator. We find some evidence that the ECB has systematically reacted to a filtered measure of money growth but weak evidence it has reacted more aggressively during excess money growth periods.

We estimate a medium-scale DSGE model for the euro area in an open economy framework. The model includes structural trends on all variables, which allow us to estimate on gross data. We first provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data, thus our model properly deals with deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro area imports during the last ten years on domestic inflation. From the first quarter of 2000 to the last quarter of 2008, we estimate the contribution of the imbalanced development of international trade on euro area inflation to an average of -0,7%, and on the 3-Month interest rate to an average of -1,4%.

Nous analysons les fluctuations du cycle économique en Zone Euro dans le cadre d'un modèle DSGE comprenant deux tendances stochastiques, une sur la productivité globale des facteurs et l'autre sur la cible d'inflation. Pour justifier notre choix de tendances intégrées, nous testons des spécifications différentes pour chacune d'elles. Afin d'éviter des biais dans l'estimation, nous estimons conjointement les tendances et les paramètres structurels du modèle. Nos estimations montrent que les fluctuations du cycle économique sont principalement expliquées par des chocs spécifiques d'investissement et des chocs de préférence des ménages. Nos résultats mettent en défaut l'idée que les chocs de mark-up sont les principaux vecteurs des fluctuations économiques dans les modèles DSGE et montrent que les chocs de productivité expliquent les fluctuations de long terme. En conclusion, nous présentons une relecture historique du cycle économique en zone euro à l'aune de notre estimation. Cette estimation donne une explication crédible des événements économiques majeurs depuis 1985.

Our study examines the amplitude and determinants of the synchronization of business cycles in China. The country’s de facto federalism suggests the importance of coordination between provincial policies. We devote special attention to the influence of provincial autonomy on industrial, tax, and trade policies. Our results indicate that domestic trade and tax coordination promote economic integration and stabilize inter-regional fluctuations. Conversely, we find that heterogeneous international-trade and production structures act as a centrifugal force ultimately harmful to China's economic cohesion., Cet article étudie l’ampleur et les déterminants de la synchronisation des cycles d’activité à l’intérieur de la Chine. Le fédéralisme de facto qui caractérise ce pays suggère l’importance de la coordination entre les différentes politiques provinciales. Nous portons une attention particulière à l’influence de l’autonomie provinciale en termes de politiques industrielles, fiscales et commerciales. Nos résultats indiquent que le commerce intérieur et la coordination fiscale influencent positivement l’intégration économique et stabilisent les fluctuations entre les régions. À l’inverse, l’hétérogénéité en termes de commerce international et de structure de production ressort comme une force centrifuge nuisible à terme à la cohésion économique de la Chine., Barthélemy Jean, Poncet Sandra. Ampleur et déterminants des cycles d’activité en Chine. In: Économie & prévision, n°185, 2008-4. pp. 1-12.