Research at the macroeconomic level of analysis is now more relevant than it has ever been. The Centre for Research in Macroeconomics and Macro-Finance (CReMMF) aims to promote research on international (open-economy) macro-modelling, real estate finance, banking, fiscal and monetary policy, and productivity, at both theoretical and empirical level. Within our research group, one developing research strand focuses on understanding regional responses to macroeconomic shocks; such analysis will enable us to feed into public policy in Wales. A further focus is to use our quantitative research to engage with the policy debate on how macroeconomic policy, alongside new banking and financial regulations, should be designed to support price stability and economic growth in the post credit crisis world. The CReMMF aims to raise the profile of our work, signalling the existence of a macroeconomic hub at Swansea to policymakers, academic collaborators and doctoral students. Our Centre includes researchers at Swansea as well as a network of collaborators including academics, professionals, and policymakers from other universities, research institutes and organisations around the world.
Advancing Macroeconomic Research for Policy, Business and Society
Projects
Director
Bo’s research expertise is in applied macroeconomics, monetary Economics, business cycles, and Dynamic Stochastic General Equilibrium (DSGE) modelling. The results of his research have been published in journals and book chapters, including Economic Journal, Journal of Economic Dynamics and Control, Journal of International Money and Finance, Economics Letters and Review of International Economics, the Oxford Handbook of the Indian Economy and Handbook of Research Methods and Applications.
Dr Bo Yang
Recent Speakers in our Seminar Series
06/03/2023
Professor Oliver Holtemöller, Professor of Economics at Martin Luther University Halle-Wittenberg
Optimal Monetary Policy in a Two-Sector Environmental DSGE Model.
Abstract:
Climate change has become central to the global economic policy agenda. Monetary authorities have begun to express concern about the economic consequence posed by climate change, requiring central banks to review their policies. Additionally, the emerging "greenflation," as a consequence of the energy transition, has raised the question of whether and how the authorities should react to aggregate and relative price developments. In this paper, we discuss the possible impact of including climate change and sub-optimal environmental policies in a two-sector dynamic stochastic general equilibrium model on the conduct of monetary policy. We then investigate the optimal monetary policy conditional on a given environmental policy. In particular, we examine the optimal response of the interest rate to sector-specific price changes following a shock. We show that when the shock induces an increase in production and demand for dirty goods, a more restrictive monetary policy is optimal. Conversely, a shock that fosters demand for clean goods leads to a more expansionary policy. We also highlight that the two goals of welfare maximization and emission minimization are not necessarily aligned.
02/02/2023
Brexit, Covid and International Migrants: An Empirical Analysis for the UK.
Abstract:
International migration flows are affected by a range of economic variables. The labour market outcomes of international migrants can also influence the economies of both home and host countries. For example, labour migrants can fill vacancies in the host country and further boost its economic growth rates by increasing consumption. They can also enhance their home economies by sending remittances that can not only increase consumption but also for investing in small businesses, property and education. These benefits will be greater if labour migrants are employed in high-paying jobs in the host country. This paper considers such issues within the context of two significant events that have recently affected the UK, namely Brexit and the Covid pandemic. In addition to examining how migration flows and the number of international migrants living in the UK have fluctuated over the past decade, there is also a detailed analysis of the changing labour outcomes of different migrant groups - with a particular focus on employment and earnings
19/01/2023
Professor Sushanta Mallick from Queen Mary, University of London.
Oil Price Dynamics in Times of Uncertainty: Revisiting the Role of Demand and Supply shocks
Abstract:
Drivers of real oil prices have been explored extensively in the literature with little consensus. Using a new identification scheme based on forecast error variance, we identify oil-specific demand, demand and oil supply shocks that maximize the sum of forecast error variance of three variables explained by their respective shocks. Estimation with the sample period until 2007 suggests that the three identified shocks have similar effects as in the early literature, with oil-specific demand shocks playing a prominent role. However, in the post-crisis period supply shocks have emerged as a source of short-run increase in oil prices and demand shocks do not have a long-run effect on prices, unlike in the pre-crisis period. Even with the inclusion of uncertainty shock, this transition to a supply shock driving oil prices in the short-run survives. These estimates overwhelmingly suggest zero short-run supply elasticity, a matter of debate in the recent literature. Although oil-specific demand shocks are predominant drivers of real oil prices, six episodes (including COVID-19) considered in this paper suggest that other shocks have also played a significant role in driving oil prices in different episodes and cannot be ignored while evaluating the oil price dynamics.
15/12/2022
Dr Babatunde Samson Omotosho, Principal Economist, Statistics Department, at the Central Bank of Nigeria
Monetary policy in an oil-exporting emerging economy with fuel subsidy
Abstract:
Fuel subsidies distort domestic price signals and thus matter for the conduct of monetary policy. This paper develops a DSGE model for an emerging oil-exporting economy with a fuel subsidy regime to analyse the stabilising role of alternative monetary rules under different subsidy arrangements. The model is estimated via Bayesian methods using data for Nigeria. This paper represents the first attempt at (i) estimating a domestic fuel pricing rule for an oil-exporting emerging economy with fuel subsidies, (ii) characterizing monetary policy behaviour under such a setting, and (iii) evaluating the appropriateness of alternative monetary rules under a model with and without fuel subsidies. The results show that approximately 45% of the changes to the global oil price are transmitted to the retail price of fuel. We find that monetary policy behaviour in the resource-rich economy is characterised by headline inflation monetary rule. However, the monetary authority is able to reduce policy loss by approximately 11 per cent if it targets core inflation rather than a measure of inflation that includes energy prices. Under a zero-subsidy regime, the core inflation monetary rule outperforms its competitors in achieving overall macroeconomic stability, provided the share of oil in household’s total consumption is relatively low.
14/11/2022
Professor Tapas Mishra, Professor and Head of Banking and Finance at the Southampton Business School, University of Southampton
Macroeconomics Effects and Housing Market Equilibrium
Abstract:
We theorise and model response heterogeneity of equilibrium housing prices to macroeconomic variations from the demand and supply sides of housing. We refine a housing stock-flow model by allowing a dynamic interplay of long-memory error corrections in the housing - macroeconomic system to accommodate a realistic possibility that the correction speed could be slow and vary between the demand and supply of housing. Using a long quarterly dataset for the U.S., our results from a fractionally cointegrated VAR estimation confirm the persistence of system-wide long-memory, ensuring slow and distinct disequilibrium corrections following macroeconomic variations from the two sides of housing. We find that impacts of macroeconomic factors that interacts exclusively on the demand/supply side of housing is biased as one neglects the other side of the narrative of housing price variations. As for the factor having differential impacts from both sides of housing, its net impact is negative and is dominated by the demand-side dynamics, indicating persistence of a relatively elastic housing demand. As an identification strategy, we perform FCVAR estimation with zero restrictions for various endogenous and exogenous predictors.
10/10/2022
Professor Oliver de Groot, University of Liverpool
US Monetary Policy at the Height of the Financial Crisis: A Constrained Optimal Policy Projections Perspective
Abstract:
We study the optimal mix of interest rate guidance and QE in the US using the information set available to the Fed in early 2009. To assess the implications of alternative assumptions, we develop an efficient method that handles commitment, limited-time commitment and discretion; multiple policy instruments and constraints on policy; alternative resolutions to the forward guidance puzzle; and does not require a fully specified general equilibrium model. We find interest rate guidance was near optimal; planned QE was insufficiently aggressive; and optimal unwinding of QE is slower under discretion than commitment. An extensive user-friendly toolkit accompanies the paper.
08/08/2022
Dr Rhys Bidder, Deputy Director of the Qatar Centre for Global Banking & Finance and a Senior Lecturer in Finance at King's Business School
Ask the banks: DSGE models through the lens of stress test data
Abstract:
Stress tests yield data on variables that are prominent in a broad class of DSGE banking models. As such, it is natural to ask whether our models' predictions align with the data and whether the data can be used to inform our modeling. We examine the data reported by the largest banks in the U.S. as part of the Fed's CCAR stress testing regime. In response to hypothetical scenarios defined in terms of macro-financial variables, banks report a wealth of information on their projected activities and results. Since the scenarios are defined under baseline and adverse contingencies we obtain novel insight into regions of the state space - crises - that are rare in historical data and plausibly followed by important structural breaks. Our stress test data is reported by banks taking into account structural changes since the GFC and, as such, should be relatively free of the Lucas Critique.
We use the data in three ways. First, given the unprecedentedly granular information on banks' activities, we initially provide a comprehensive description of the data, to provide stylized facts for future research. In particular, we emphasize portfolio structure, capital and liability structure, borrowing and lending spreads - from an aggregate and heterogeneous bank perspective. Second, recognizing that DSGE models provide a useful organizing structure for such a vast dataset, we examine certain stylized DSGE models that make strong predictions about a small subset of variables and test whether these predictions are borne out in the banks' projections. In particular, we focus on the relationship between bank net worth and amounts and cost of lending and on the joint predictions for leverage, equity and value-at-risk (VaR) emphasized by Adrian and Shin (2014). Third, and most ambitious, we take the data to a medium scale DSGE model. Formally, we establish a set of moments for key variables based on the stress test data and, paired with the model, use these to elicit `stress test' priors on structural parameters. With these priors in hand we estimate the model on historical data once with `traditional' priors and once with the traditional priors amended by the stress test priors. We then discuss how this tilting of priors affects inference about parameters.
14/03/2022
Dr Michael Hatcher, University of Southampton
Solving linear rational expectations models in the presence of structural change: Some extensions
Abstract:
Standard solution methods for linear rational expectations models assume a time-invariant structure. Recent work has gone beyond this by formulating solution methods for linear rational expectations models subject to structural changes, such as parameter shifts and policy reforms, that are announced in advance. This paper contributes to this literature by presenting solutions for some cases -- imperfectly credible policy reforms; delayed announcement to some fraction of agents; and indeterminacy of the terminal solution (multiple equilibria) -- that received little attention so far. These solutions are illustrated using several applications, including a New Keynesian model in which the Taylor principle is not satisfied by the terminal structure.
28/02/2022
Professor Akos Valentinyi, University of Manchester
New Evidence on Sectoral Productivity: Implications for Industrialization and Development
Abstract:
Moving labor from agriculture into manufacturing (``industrialization'') is often viewed as essential for the development of poor countries. We present new evidence on the channels through which industrialization can help poor countries close the productivity gap with rich countries. To achieve this, we leverage recent data releases by the Groningen Growth and Development Centre to build a new dataset of comparable productivity levels in agriculture and manufacturing for 64 mostly poor countries during 1990-2018. We find two key results: (i) productivity gaps in manufacturing are larger than in the aggregate and (ii) there is no tendency for manufacturing productivity to converge. While these results challenge the notion that manufacturing employment is essential for development, we also find that in poor countries higher productivity growth in manufacturing is associated with higher productivity growth in the aggregate.
31/01/2022
Professor Paul Levine, University of Surrey
The Use and Mis-Use of SVARs for Validating DSGE Models
Abstract:
This paper studies the potential ability of a SVAR to match impulse response functions of a well-established estimated DSGE model. We study the invertibility-fundamentalness problem, often described in the macro-econometrics literature as one of "missing information" when the econometrician has only a subset of the information of the model's agents. We refer to this econometrician's problem as "E-invertibility". But in our paper it is imperfect information on the part of both agents and the econometrician that takes centre stage; indeed the information sets can be the same. We refer to the agents' problem as "A-invertibility"; in its absence the perfect and imperfect RE solutions of the model diverge. We first briefly describe conditions for the RE solution of a linearized Gaussian NK-DSGE model to be invertible taking into account the information sets of agents. We then estimate a SVAR by generating artificial data from the theoretical model. Based on the VAR(1) representation of the DSGE model, we compare three forms of SVAR-identification restrictions; zero, sign and theory-driven bounds on the forecast error variance, for mapping the reduced form residuals of the empirical model to the structural shocks of interest. Separating out two reasons why SVARs cannot recover the impulse responses to structural shocks of the DGP, namely non-invertibility and inappropriate identification restrictions, is then the main objective of the paper.
22/11/2021
Dr Margarita Rubio, Associate Professor, University of Nottingham
Macroprudential Policies and Brexit: A Welfare Analysis
Abstract:
Brexit will bring many economic and institutional consequences. Among others, Brexit will have implications on financial stability and the implementation of macroprudential policies. One immediate effect of Brexit is the fact that the United Kingdom (UK) will no longer be subject to the jurisdiction of the European Supervisory Authorities (ESAs) nor the European Systemic Risk Board (ESRB). This paper studies the welfare implications of this change of regime, both for the UK and the European Union (EU). By means of a Dynamic Stochastic General Equilibrium model (DSGE), I compare the pre-Brexit scenario with the new one, in which the UK sets macroprudential policy independently. I find that, after Brexit, the UK is better off by setting its own macroprudential policy without taking into account Europe's welfare as a whole. Given the small relative size of the UK, this implies just slight welfare loss in the EU.
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