Large Output Gap Research Articles

Impact and Challenges of Reducing Petroleum Consumption for Decarbonization

This study aimed to identify the impact of achieving the 1.5 °C target on the petroleum supply chain in Japan, and discuss the feasibility and challenges of decarbonization. First, a national material flow was established for the petroleum supply chain in Japan, including processes for crude petroleum refining, petroleum product manufacturing, plastic resin and product manufacturing, and by-product manufacturing. In particular, by-product manufacturing processes, such as hydrogen, gaseous carbon dioxide, and sulfur, were selected because they are utilized in other industries. Next, the outlook for the production of plastic resin, hydrogen, dry ice produced from carbon dioxide gas, and sulfur until 2050 was estimated for reducing petroleum consumption required to achieve the 1.5 °C target. As a result, national petroleum treatment is expected to reduce from 177,048.00 thousand kl in 2019 to 126,643.00 thousand kl in 2030 if the reduction in petroleum consumption is established. Along with this decrease, plastic resin production is expected to decrease from 10,500.00 thousand ton in 2019 to 7511.00 thousand ton by 2030. Conversely, the plastic market is expected to grow steadily, and the estimated plastic resin production in 2030 is expected to be 20,079.00 thousand ton. This result indicates that there is a large output gap between plastic supply and demand. To mitigate this gap, strongly promoting the recycling of waste plastics and making the price competitiveness of biomass plastics equal to that of petroleum-derived plastics are necessary.

THE EFFECT OF SPATIAL DEPENDENCE ON MEASUREMENT OF TECHNICAL EFFICIENCY: SPATIAL STOCHASTIC FRONTIER ANALYSIS FINDINGS FOR MANUFACTURING INDUSTRY

Bu çalışmanın amacı 2019 dönemi için farklı bölgelerde kurulu üretim tesisi bulunan 76 imalat sanayi firmasının mekansal bağımlılığı dikkate alarak teknik etkinlik değerlerini tahmin etmektir. Mekansal bağımlılığın ekonomik birimlerin performası üzerinde etkisinin olabileceğine yönelik literatürde genel kabul olmasına rağmen, etkinlik üzerine yapılan çok az çalışma bu etkiye dikkate almaktadır. Bu amaçla çalışmada Fusco ve Vidoli (2013) tarafından önerilen ve henüz güncel bir yaklaşım olan Mekansal Stokastik Sınır Analizi (SSFA) kullanılarak, mekansal bağımlılığın firmaların etkinlik skorları üzerindeki etkisi analiz edilmiştir. Elde edilen sonuçlar teknik etkinlik skorları arasında mekansal otokorelasyonun olduğunu göstermektedir. Mekansal bağımlılık altında tahmin edilen teknik etkinlik skorları ortalaması 0.444’tür. Dolayısıyla, teknik etkinliğin iyileştirilmesinde firmalar için geniş bir çıktı boşluğu bulunmaktadır. Ayrıca, etkinsizliğin belirleyenleri içerisinde mekansal bağımlılıktan kaynaklanan etkinin sınırlı kaldığı sonucuna ulaşılmıştır. Buna göre, etkinsizlik farklılıklarının mekansal etkilerden daha çok firmaların bireysel özelliklerinden kaynaklandığı söylenebilir. Öte yandan, mekansal bağımlılığın sonucu olarak firmaların teknik etkinlik skorlarının birbirine yakınsadığı görülmektedir.

Good enough for government work? Macroeconomics since the crisis

This paper argues that when the financial crisis came policy-makers relied on some version of the Hicksian sticky-price IS-LM as their default model; these models were ‘good enough for government work’. While there have been many incremental changes suggested to the DSGE model, there has been no single ‘big new idea’ because the even simpler IS-LM type models were what worked well. In particular, the policy responses based on IS-LM were appropriate. Specifically, these models generated the insights that large budget deficits would not drive up interest rates and, while the economy remained at the zero lower bound, that very large increases in monetary base wouldn’t be inflationary, and that the multiplier on government spending was greater than 1. The one big exception to this satisfactory understanding was in price behaviour. A large output gap was expected to lead to a large fall in inflation, but did not. If new research is necessary, it is on pricing behaviour. While there was a failure to forecast the crisis, it did not come down to a lack of understanding of possible mechanisms, or of a lack of data, but rather through a lack of attention to the right data.

Policy Trilemma in India: Exchange Rate Stability, Independent Monetary Policy and Capital Account Openness

This paper aims to investigate the situation of policy trilemma in India. Analysing the quarterly data from 1991 to 2015, we find that though the trilemma constraint is binding in the long run, there is ample evidence of short-run deviations from the constraint. Intervention in the foreign exchange market by the Reserve bank of India has successfully helped to relax this constraint. The policy mix has changed over this period – the degree of capital account openness has gradually increased, mainly at the cost of exchange rate stability. We further examine the determinants and the macroeconomic effects of the trilemma policy configuration. We find that the trilemma efficiency depends on the financial stress, financial development, intervention by the Central bank and the liquidity in the economy. Higher monetary policy independence helps to reduce the inflation rate while exchange rate stability and capital account openness are associated with the higher growth rate and the larger output gap.

Janet Yellen: Time to Tighten?

In August 2015, Janet Yellen, chair of the Board of Governors of the Federal Reserve System (the Fed), was feeling uncertain. Many were trying to anticipate her decision about whether she and the Federal Open Market Committee (FOMC) would raise interest rates at the upcoming September meeting. But Yellen herself wasn't sure. Yellen wanted to understand the perspective of those who continued to worry about the consequences of expansionary monetary policy. To do so, and to understand the policy tradeoffs she faced, she had to consider the history of events that led to her current conundrum. Excerpt UVA-GEM-0139 Rev. Aug. 23, 2017 Janet Yellen: Time to Tighten? In August of 2015, Janet Yellen was, in a word, uncertain. Many were trying to anticipate her decision about whether she and the Federal Open Market Committee (FOMC) of the Federal Reserve System (the Fed) would raise interest rates at the upcoming September meeting. But Yellen herself wasn't sure. She was known for expressing concerns about unemployment—she had at times favored expansionary monetary policy to fight unemployment. But considering that interest rates had been at the lowest level in the Fed's history for over six years (Exhibit1), the unprecedented expansion of the monetary base since the Great Recession (Exhibit2), and the potential risks for asset price bubbles and eventual inflation, Yellen yearned for a normalization of U.S. monetary policy. The Fed's charter dictates a dual mandate: it must adjust monetary policy to achieve maximum employment and stable inflation. The challenge for Yellen—and for central banks around the world—was that these competing objectives were often difficult to balance. Furthermore, some members of the FOMC and prominent economists worried that efforts to achieve these objectives today could have adverse consequences for inflation and employment in the future. James Bullard, president of the Federal Reserve Bank of St. Louis, expressed his concerns in a February 2012 speech: The recent recession has given rise to the idea that there is a very large “output gap” in the U.S. The story is that this large output gap is “keeping inflation at bay” and is fodder for keeping nominal interest rates near zero into an indefinite future. If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates. This could be a looming disaster for the United States. . . .

Secular stagnation – are we stuck in Summers' long winter?

We estimate that the UK has a relatively large output gap of around 2¾% of potential output. With the legacy of the financial crisis fading, the UK should see healthy growth in potential output of around 2.1% a year from 2015–24. Usually this would drive a period of strong economic growth, but we expect GDP growth to average a relatively underwhelming 2.4% a year over this period, largely due to the drag from aggressive fiscal consolidation. There is significant disagreement amongst economists about the size of the output gap. Estimation of the output gap has been problematic since the financial crisis because of the depth of the recession and relatively slow pace of the subsequent recovery, while sizeable revisions to the national accounts data have been an added complication. Our estimate of the output gap is towards the top of the range of independent forecasters surveyed by HM Treasury, but it is consistent with the literature on the impact of financial crises on potential output. We expect potential output growth of 2.1% a year from 2015–24, a faster pace than that seen since the financial crisis, but some way short of the experience of the pre‐crisis decade. The shortfall relative to the pre‐crisis period is largely due to a smaller contribution from growth in labour supply, which reflects the impact of an ageing population. However, labour is set to make a much stronger contribution to potential output growth in the UK than in most other major European countries over the next decade. The combination of a large output gap and healthy growth in potential output will provide the conditions for firm growth and low inflation over the medium term, with GDP growth expected to average 2.4% a year from 2015 to 2024. Growth could be stronger were it not for the sizeable drag from fiscal consolidation over the next four years and the dampening effect that this will have on activity. This will ensure that the output gap closes very slowly. The government's fiscal plans are heavily influenced by the OBR's view that there is limited scope for stronger growth to drive an improvement in the public finances. But if our view turns out to be correct, it will become apparent that the government has pursued a more austere path than is strictly necessary in order to comply with its fiscal rules.

Abenomics: Preliminary Analysis and Outlook

In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a 2 percent inflation target and specified concrete actions to achieve this goal by 2015. In 2013, Shinzo Abe’s government supported this change with fiscal policy and planned structural reforms. Together with the Bank of Japan’s aggressive monetary easing, this policy package is known as “Abenomics.” We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.8 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In both the medium and the long run, Abenomics will likely continue to be stimulative. However, the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan’s large output gap. In part this is because the Bank of Japan’s 2 percent inflation target is not yet fully credible. We conclude by outlining a way to interpret future data releases in light of our results.

Why did unemployment respond so differently to the global financial crisis across countries? Insights from Okun’s Law

AbstractThe global financial crisis deeply impacted labour markets around the globe. In the case of the United States, some commentators have argued that the subsequent rise in unemployment exceeded previous estimates of the elasticity of the unemployment rate with respect to output growth, a statistical relationship known as Okun’s law. In contrast, others find a stable, long-term estimate of Okun’s coefficient implying that the deviation in unemployment during the crisis resulted from a larger output gap (not a structural shift in the trend). Ultimately, estimates of this relationship will depend on the methodology and data period utilized. Focusing more on short-term fluctuations, changes in unemployment are decomposed to identify the association with other channels of labour market adjustment (hours, productivity and labour force). Results presented in this paper confirm the cross-country variation in the responsiveness of unemployment in the wake of the Great Recession. In the United States, Canada, Spain and other severely affected economies, estimates of Okun’s coefficient increased sharply, departing from pre-crisis levels. In other countries, where unemployment has remained subdued, such as Germany and the Netherlands, the coefficient has fallen dramatically over the short-term. While other factors can explain the heterogeneous impact of the global financial crisis on labour markets in OECD countries, this paper focuses on the contribution of labour market institutions (employment protection legislation) in explaining cross-country differences and shifts in the estimated Okun’s coefficient. In this regard, empirical evidence confirms that the responsiveness in the unemployment rate during the global downturn was lower in countries where workers are afforded greater employment protection such as Germany.JEL codesE24, J64, G01

Reindustrialization strategy of Serbia: How to get it and how to use it

Serbia's economic crisis is not cyclical, but structural. Our starting point is that reindustrialization is the cornerstone of the anti-crisis program and the road map for coordinated response to the crisis. The article incorporates four sections, along with Introduction and Conclusion. The first part reviews the macroeconomic situation in the mid-2013. The analysis indicates that anti-crisis program is imperative due to large output gap resulting from deindustrialization. The second part of the article analyzes the concept and the main components of anti-crisis program. The third part provides economic policy proposals for reindustrialization. Finally, we identify priority sectors for reindustrialization. For the most part, economics is not an exact science. This particularity allows that everybody thinks they know it, especially politicians. That is why economics often has no further scope than a gizmo science in the hands of politicians. Given that, this article represents an attempt to provide contribution from microeconomic (or business) perspective, while not ignoring macroeconomic one, to exit from profound and overwhelming crisis into which Serbia persistently sinks. As business economics professionals, we share certain shame that a nation which can be proud of Nikola Tesla and Mihajlo Pupin, as well as of many great people from the field of theoretical and applied engineering, has not been able to create level playing field for development of industrial economy. Adequate institutional framework encourages technological development as well as commercial use of innovations in tradable sectors and, consequently, fosters an economic and social development which could make Serbia comparable with other European countries. The future of our future must be brighter than the time we are facing today. It will not be easy because we must simultaneously eliminate the burden from the past and adapt the economy to transformative global discontinuity challenges.

Macroeconomic Effects of Federal Reserve Forward Guidance

A large output gap accompanied by stable inflation close to its target calls for further monetary accommodation, but the zero lower bound on interest rates has robbed the Federal Open Market Committee (FOMC) of the usual tool for its provision. We examine how public statements of FOMC intentions — forward guidance — can substitute for lower rates at the zero bound. We distinguish between Odyssean forward guidance, which publicly commits the FOMC to a future action, and Delphic forward guidance, which merely forecasts macroeconomic performance and likely monetary policy actions. Others have shown how forward guidance that commits the central bank to keeping rates at zero for longer than conditions would otherwise warrant can provide monetary easing, if the public trusts it. We empirically characterize the responses of asset prices and private macroeconomic forecasts to FOMC forward guidance, both before and since the recent financial crisis. Our results show that the FOMC has extensive experience successfully telegraphing its intended adjustments to evolving conditions, so communication difficulties do not present an insurmountable barrier to Odyssean forward guidance. Using an estimated dynamic stochastic general equilibrium model, we investigate how pairing such guidance with bright-line rules for launching rate increases can mitigate risks to the Federal Reserve’s price stability mandate.

Macroeconomic Effects of Federal Reserve Forward Guidance

A large output gap accompanied by stable inflation close to its target calls for further monetary accommodation, but the zero lower bound on interest rates has robbed the Federal Open Market Committee (FOMC) of the usual tool for its provision. We examine how public statements of FOMC intentions—forward guidance—can substitute for lower rates at the zero bound. We distinguish between Odyssean forward guidance, which publicly commits the FOMC to a future action, and Delphic forward guidance, which merely forecasts macroeconomic performance and likely monetary policy actions. Others have shown how forward guidance that commits the central bank to keeping rates at zero for longer than conditions would otherwise warrant can provide monetary easing, if the public trusts it. We empirically characterize the responses of asset prices and private macroeconomic forecasts to FOMC forward guidance, both before and since the recent financial crisis. Our results show that the FOMC has extensive experience successfully telegraphing its intended adjustments to evolving conditions, so communication difficulties do not present an insurmountable barrier to Odyssean forward guidance. Using an estimated dynamic stochastic general equilibrium model, we investigate how pairing such guidance with bright-line rules for launching rate increases can mitigate risks to the Federal Reserve’s price stability mandate.

Taylor’s Rule versus Taylor Rules

Does the Taylor rule prescribe negative interest rates for 2009-2011? This question is important because negative prescribed interest rates provide a justification for quantitative easing once actual policy rates hit the zero lower bound. We answer the question by analyzing Fed policy following the recessions of the early-to-mid 1970s, the early 1990s, and the early 2000s in the context of both Taylor’s original rule and latter variants of Taylor rules. While Taylor’s original rule, which can be justified by historical experience during and following the recessions, does not produce negative prescribed interest rates for 2009-2011, variants of Taylor rules with larger output gap coefficients, which do produce negative interest rates, cannot be justified by the same historical experience. We conclude that the Taylor rule does not provide a rationale for quantitative easing.

How Has the Financial Crisis Affected the Eurozone Accession Outlook in Central and Eastern Europe?

This paper analyses how the financial crisis has affected task of meeting the Maastricht Criteria for the eight Central and Eastern European Countries which have yet to join the euro. It identifies the channels by which the crisis has fed through to deficits, debt, interest rates and inflation and seeks to provide numerical estimates of these factors. Deficits have worsened, but for most countries the problem is still primarily structural rather than cyclical. Debts have risen, but only in the cases of Latvia and Poland has the crisis changed the outlook for meeting the criterion. Inflation has fallen, particularly in the Baltic states on account of large output gap declines. The depth of the recession is likely to depress inflation rates for several years. Lastly, the interest rate criterion is more challenging because of the rise in spreads since the crisis.

Still Minding the Gap: Inflation Dynamics During Episodes of Persistent Large Output Gaps

This paper studies inflation dynamics during 25 historical episodes in advanced economies where output remained well below potential for an extended period. We find that such episodes generally brought about significant disinflation, underpinned by weak labor markets, slowing wage growth, and, in many cases, falling oil prices. Indeed, inflation declined by about the same fraction of the initial inflation rate across episodes. That said, disinflation has tended to taper off at very low positive inflation rates, arguably reflecting downward nominal rigidities and well-anchored inflation expectations. Temporary inflation increases during episodes were, in turn, systematically related to currency depreciation or higher oil prices. Overall, the historical patterns suggest little upside inflation risk in advanced economies facing the prospect of persistent large output gaps.

Still Minding the Gap - Inflation Dynamics During Episodes of Persistent Large Output Gaps

This paper studies inflation dynamics during 25 historical episodes in advanced economies where output remained well below potential for an extended period. We find that such episodes generally brought about significant disinflation, underpinned by weak labor markets, slowing wage growth, and, in many cases, falling oil prices. Indeed, inflation declined by about the same fraction of the initial inflation rate across episodes. That said, disinflation has tended to taper off at very low positive inflation rates, arguably reflecting downward nominal rigidities and well-anchored inflation expectations. Temporary inflation increases during episodes were, in turn, systematically related to currency depreciation or higher oil prices. Overall, the historical patterns suggest little upside inflation risk in advanced economies facing the prospect of persistent large output gaps.