Intertwining Inequality and Labor Market under the New Normal
This paper builds on a life cycle model of occupational choices and financial frictions to understand the main channel through which demography and inequality influence the economy. Based on household data from Thailand, younger cohorts are likely to be workers and older cohorts are likely to be entrepreneurs due to age-dependent skills and asset accumulation. Under the new normal faced by the Thai economy as well as others, aging population can lower overall total factor productivity and increase inequality. An increase in equilibrium wage due to shortage of labor supply drives mediocre entrepreneurs to become self-employed – a low-income and low-productivity occupation – and worsens total factor productivity and hence inequality. Moreover, a decline in world interest rates associated with global aging population will exacerbate this negative effect. Reducing financial frictions or alleviating a borrowing constraint of talented entrepreneurs can mitigate this effect while extending retirement age will only improve output per capita while total factor productivity and inequality worsen.
Rethinking Potential Output: Embedding Information about the Financial Cycle
This paper argues that information about the financial cycle should be incorporated in measures of potential output. Identifying potential output with non-inflationary output is too restrictive given that growing financial imbalances can place output on an unsustainable path even if inflation is low and stable. We propose a simple and transparent framework to accommodate information about the financial cycle in constructing output gap estimates. Applied to US data, our approach yields measures of potential output that are not only estimated more precisely, but also much more robust in real time. Inflation, by comparison, carries very little information that can be exploited to infer potential output.
Extracting Market Inflation Expectations: A Semi-structural Macro-finance Term Structure Model
This paper estimates the term structure of inflation expectations using a semi-structural macro-finance term structure model based on new Keynesian macroeconomic framework and the arbitrage-free affine term structure model which defines bond prices as an affine function of state variables. Key economic variables and Thai government bond yield curve data are used to filter out for unobserved components. While letting the inflation target adapts over time, the results suggest that the inflation target has trended down under inflation targeting regime. The long-term inflation expectation is well anchored while the inflation risk premium has dropped substantially over the past five years. The real interest rate is considerably volatile and is a major contributor to movements in the 10-year government bond yield.
Inflation expectations and monetary policy in Thailand
This paper examines the relationship between inflation expectations and monetary policy in Thailand. The forward-looking Taylor rule is applied to measure monetary policy actions. Inflation expectations extracted from the yield curves are used. Our results provide two key findings. First, we find econometric evidence that inflation expectations react to monetary policy actions. A tighter monetary policy can curb expected inflation not only for short-term expectations but also for long-term expectations. These results are valid for both the reducedform single-equation and the structural-form system-of-equations estimation. Second, the monetary policy stance as measured by the residuals from the forward-looking Taylor rule is able to capture the relationship between monetary policy and inflation expectations better than the outcome-based policy rule. These results may explain the weak evidence in previous studies of the relationship between inflation expectation and monetary policy.
Extreme Linkages in Financial Markets: Macro Shocks and Systemic Risk
The recent IMF World Economic Outlook (2013) investigates how real and ﬁnancial shocks can cause a sharp increase in cross country output co-movements. This paper looks at the reverse issue by asking how macro regimes of extreme low and high inﬂation or productivity growth are conducive to spillover of ﬁnancial market shocks between major open economies. Using a non-parametric measure we study the largest movements in the US and German equity index returns conditional on a speciﬁc macro regime in one or both of the countries. It is known that the unconditional probability of diﬀerent stock markets crashing jointly is non-negligible, see e.g. Hartmann et al. (2004) and Poon et al. (2004). The results suggest that the factor related to real economy, i.e. industrial production growth, is a major driver behind the extreme loss linkage, but inﬂation is not. One explanation is that monetary policy shocks are absorbed by the exchange rate, whereas technology shocks do spillover.
Stability of Thai Baht: Tales from the Tails
We demonstrate how the EVT-based signalling approach for currency crises can be applied to an individual country with a small sample size. Using Thai historical data, first, we study the tail characteristics of the distributions of two Thai baht instability measures and 21 economic fundamentals. Then, we test asymptotic dependence between the currency instability measures and lagged economic fundamentals. Empirically, we find that the distributions of both currency instability measures and economic variables are heavy tailed. Assuming a normal distribution for the variables tends to underestimate the probability of extreme events. Furthermore, most of the economic variables which are usually used as signalling indicators for currency crises are asymptotically independent of the currency instability measures. Signals issued by these variables are thus not reliable. Nevertheless, the non-parametric EVT approach facilitates the selection of economic indicators with credible signals and high crisis prediction success.