Adverse Economic Shocks Research Articles

The heterogenous effects of initial labor market conditions on entrants' careers across types of colleges

In this paper, the effects of entering the labor market during the Asian financial crisis on the labor market outcomes for vocationally oriented college and academically oriented college graduates were analyzed. Using panel data on South Korea, it was found that adverse economic shock significantly affects the labor market outcomes for academically oriented college graduates after graduation. Specifically, male graduates from academically oriented colleges experienced severe and persistent wage and employment losses. Vocationally oriented college graduates did not experience significant employment or wage problems during the recession. Finally, graduates from prestigious colleges can offset their wage loss due to adverse economic shock through the wage premia of college prestige. College prestige can alleviate the negative effects of the recession on graduates’ wages. The findings suggest that graduates during a recession, depending on their college type, experience different paths of labor market outcomes in the years after their college graduation.

Remittances and government expenditures on human capital in developing countries

This paper investigates the effect that remittances have on government expenditures on human capital within a large panel of developing countries. Remittances reduce government expenditures on education by 0.23–0.84 percentage points for every 10 percentage point increase in remittances. Remittances, by contrast, increase government expenditures on health by 0.99–1.83 percentage points for every 10 percentage point increase in remittances. These findings indicate that remittances induce reallocation of government expenditures from education to health. Democratic political institutions shape the relationship between remittances and government expenditures on human capital. I present additional evidence that government expenditures on education respond differentially to remittances in Small Island Developing States, a group of countries with unique characteristics that make them vulnerable to adverse economic and environmental shocks.

Cash and Conflict: Large-Scale Experimental Evidence from Niger

Conflict undermines development, while adverse economic shocks, in turn, can increase conflict risk. Policy interventions such as cash transfers could attenuate conflict risk by raising poor households’ opportunity costs. However, cash transfers may also trigger looting, and expanding government programs may attract attacks to undermine state legitimacy. We study the net effect across these forces based on the large-scale randomization of a government-led cash transfer program and georeferenced conflict events. Cash transfers did not yield greater pacification but—if anything—triggered a short-term increase in conflict events (by 0.63 percentage points), substantially driven by terrorist attacks by foreign rebel groups. (JEL D72, D74, H53, I38, O15, O17)

Economic Distress and Children’s Mental Health: Evidence from the Brazilian High-Risk Cohort Study for Mental Conditions

Abstract This paper assesses the effects of adverse economic shocks on children’s mental health. We rely on the Brazilian High-Risk Cohort Study for mental conditions, which provides an unprecedented array of data on psychopathology, life events, family medical history as well as parental behaviour and polygenic scores for mental disorders over a ten-year period. Our empirical strategy exploits parental job loss events over time in a difference-in-differences framework. We document that parental job loss significantly worsens children’s mental health, resulting in increased clinical diagnoses of mental disorders. These results are robust to several specifications and pre-trends. Heterogeneous results and mechanism analysis indicate that psychological distress in the household brought about by job loss events may be a key mechanism affecting children’s mental health.

Credit constraints and firms’ decisions: Lessons from the COVID-19 outbreak

Using novel survey data on Italian firms’ expectations, collected just before and after the beginning of the COVID-19 outbreak, we investigate the role of credit constraints in the transmission of adverse economic shocks. Our results show that credit-constrained firms plan to charge higher prices than unconstrained ones while expecting a larger fall in quantities. When we consider realized outcomes, however, these differences are less pronounced. This evidence is consistent with the credit programs implemented during the crisis being largely unanticipated at its outbreak and benefiting constrained firms relatively more.

Personal Economic Shocks and Public Opposition to Unauthorized Immigration

AbstractDo negative economic shocks heighten public opposition to immigration, and through what mechanisms? Extant research suggests that economic circumstances and levels of labour market competition have little bearing on citizens' immigration attitudes. Yet personal economic shocks have the potential to trigger the threatened, anti-immigration responses – possibly through channels other than labour market competition – that prior cross-sectional research has been unable to detect. To examine these propositions, we used a unique panel study which tracked a large, population-based sample of Americans between 2007 and 2020. We found that adverse economic shocks, especially job losses, spurred opposition to unauthorized immigration. However, such effects are not concentrated among those most likely to face labour market competition from unauthorized immigrants. Instead, they are concentrated among white male Americans. This evidence suggests that the respondents' anti-immigration turn does not stem from economic concerns alone. Instead, personal experiences with the economy are refracted through salient socio-political lenses.

Does social assistance disincentivise employment, job formality, and mobility?

How do cash transfers affect employment, job formality, and mobility, especially in times of crises and economic recovery? I examine this question in the context of Indonesia’s major unconditional cash transfer (UCT) programmes, rolled out in a targeted manner in response to adverse economic shocks. Identification is based on a generalised difference-in-differences with propensity score matching approach exploiting three waves of nationally representative longitudinal data on household transfer receipts and labour market outcomes. Annual retrospective data in each survey wave allows me to look at immediate effects, potentially important due to the transient nature of the transfers. Consistent with the income and substitution effects, when cash transfers are distributed using a more precise proxy-means test and current, dynamic welfare information, beneficiaries are more likely to adjust their labour supply in order to qualify for or maintain their benefits. Individuals with lower skill levels show a more pronounced response, with a significant decrease in both employment and job formality. The larger effect on job formality highlights the importance of the adjustment margin through the substitution effect associated with the targeting design.

Do short-term unconditional cash transfers change behaviour and preferences? evidence from Indonesia

ABSTRACT Short-term unconditional cash transfers are used as a temporary mitigation strategy during adverse economic shocks. They can however, cause adverse unintended impacts on behaviour and preferences. We estimate the effect of receiving short-term unconditional cash transfers on behaviour, risk aversion, and intertemporal choice in Indonesia. The country first introduced the program in 2005 and continues to use it whenever adverse economic shocks occur. With 15.5 million beneficiary households, the program remains one of the largest in the world. We use an individual-level longitudinal dataset spanning 1997 – 2014. To identify a causal relationship, we combine coarsened exact matching with difference-in-differences. We find no evidence that the short-term unconditional cash transfer affected beneficiaries’ behaviour or preferences. Together with evidence of its positive impact in mitigating the impact of adverse economic shocks, our findings show that short-term unconditional cash transfers should continue to be part of the government’s portfolio of social protection programs.

Impact of Basel III liquidity and capital regulations on bank lending and financial stability: Evidence from emerging countries

AbstractWe examine the impact of Basel III's liquidity requirements, such as the liquidity coverage ratio (LCR), net stable funding ratio (NSFR), and capital adequacy, on bank lending and financial stability using data from 688 commercial banks of 10 developing economies from 2014 to 2021 using fixed effects panel estimation. The findings of the study support that bank lending is positively impacted by the regulatory capital and the short‐term liquidity requirement (LCR), but negatively impacted by the NSFR. We find that the bank's Z‐score benefits from achieving the required capital and liquidity requirements. Lending growth and bank stability are nonlinearly impacted by regulations governing bank capital and liquidity. Furthermore, we use the Generalized Methods of Moments‐Quantile Regression (GMM‐QR). Finally, our results indicate that regulators in these developing countries should support adequate capital and liquidity management to lessen adverse economic shocks' impact on banks' intermediation capabilities and stability.

Currency concentration in sovereign debt, exchange rate cyclicality, and volatility in consumption

For emerging economies, borrowing abroad is a double-edged sword: it can buffer against adverse economic shocks and smooth their domestic consumption; however, it can also amplify volatility in consumption, depending on the currency in which the debt is denominated and cyclicality in the borrower’s exchange rate. We empirically investigate the nexus among external debt portfolios, exchange rate cyclicality, and volatility in consumption of low- and middle-income countries. Since 1980, many countries have concentrated their external debt portfolios’ currency composition. By constructing debt-weighted effective exchange rates, we find that currency concentration magnifies exchange rate pro-cyclicality, making domestic consumption more volatile when national income fluctuates. Our results endorse diversifying the currency composition of external debt to mitigate the negative consequences of “original sin.”

The Political Economy Consequences of China’s Export Slowdown

Abstract We study how adverse economic shocks influence political outcomes in strong authoritarian regimes, by examining the export slowdown in China during the mid-2010s. We first show that prefectures that experienced a more severe export slowdown witnessed a significant increase in incidents of labor strikes, using a shift-share instrumental variables strategy. The prefecture party secretary was subsequently more likely to be replaced by the central government, particularly if the rise in strikes was greater than in other prefectures that saw comparable export slowdowns. These patterns are consistent with a simple framework we develop, where the central government makes strategic use of a turnover decision to induce effort from local officials in preserving social stability, and to screen them for retention. In line with the framework’s predictions, we find a heightened emphasis by local party secretaries—particularly younger officials whose career concerns are stronger—on upholding stability following negative export shocks. This is evident in both words (from textual analysis of official speeches) and deeds (from expenditures on public security and social spending).

Geographical diversification using ETFs: Multinational evidence from COVID-19 pandemic

We examine the relations between dollar flows of U.S. listed ETFs with exposure to the U.S., Europe, Asia, and the rest of the world following an emergency like the COVID-19 crisis. Using a Markov Switching Model (MSVAR), we find evidence that investors use ETFs to gain exposure to foreign markets and swiftly adjust their portfolio's allocation in response to the change in the number of COVID-19 infected people in every location. We further extend our study to ETFs listed in the U.S., Europe, and Asia and investigate the change in foreign and domestic money flow, before and after the pandemic. We show that investors around the world rebalance their portfolios by monitoring the countries’ performance in controlling the pandemic. Our findings show that while investors in the U.S. and Asian countries direct their money to domestic funds and reduce their foreign investment following the pandemic, European investors increase foreign investment and reduce home bias. This is consistent with the flight-to-safety effect when investors shift their asset allocation away from riskier investments (here riskier locations) and into safer ones during the adverse economic shock.

Are Business Policy Measures in Response to the COVID-19 Pandemic to Be Equally Valued? An Exploration According to SMEs Owners’ Business Expectations

A variety of public economic policy measures have been designed and implemented in an effort to enable SMEs to limit damages resulting from the adverse sanitary and economic shocks associated with COVID-19. The originality of our study is to propose a rating of the various economic policy measures, the rating being expressed by SMEs owners conditional to their business expectations. In so doing, our contribution is to highlight the policy measures to be implemented in order to support resilient and ambitious ventures with the most positive prospects, which are likely to contribute the most to economic recovery. We exploit an original and rich dataset derived from a survey conducted in May 2020 among a representative sample of more than 2100 Belgian (Walloon) SMEs. The Belgian experience is remarkable because the wide variety of measures it undertook echoes many of the measures taken by OECD countries. Our results suggest that the respondents have an overall positive evaluation of the various economic and social policy measures implemented by the Belgian authorities. More importantly, the rating by SME owners with the most favorable expectations are, however, significantly different than their counterpart. Measures helping firms to maintain their workforce are particularly highly rated by firms with the best prospects. It also appears that those firms prefer short-term and transitory measures.

Adversity in Infancy and Childhood Cognitive Development: Evidence from four developing countries

Abstract Background The effects of early life experiences on adult outcomes manifest through the childhood years. Since adult outcomes take many years to appear, and less amenable for policy, investigating the relationship between early life experiences on childhood outcomes is more relevant for policy. This study, by examining the association between adverse experiences in early infancy (AEI) on childhood cognitive development, provides early actionable evidence on how early environment of children can be manipulated to make a tangible difference in their cognitive development during childhood to achieve better outcomes later in life. Methods A total of 8,000 children followed over three rounds from age 1 to 8 years (2002 to 2009), as part of the Young Lives study in Ethiopia, India, Peru and Vietnam were included. Childhood cognition was measured with the Peabody Picture Vocabulary Test (PPVT) administered in round 2 and round 3, at average ages of 5 (PPVT-5) and 8 (PPVT-8), respectively. The primary independent variable was adverse experience in infancy (AEI) score, constructed using measures on child's weight, exposure to adverse household, economic, and environmental shocks as reported by a parent or a care giver in round 1 (age 1). The AEI scores were classified as 0, 1, 2, 3, 4, or > =5, with smaller numbers representing less severe adversities. Ordinary least squares (OLS) regression model was used to estimate the association between the AEI at age 1, PPVT-5, and PPVT-8, controlling for key demographic and socioeconomic factors. Results Both PPVT-5 and PPVT-8 were significantly lower for children who were exposed to adverse experiences at age 1. As the AEI score (range: 0-5) rose from 0 to 1, 2, 3, 4 and > =5, the PPVT-5 score decreased by 0.6, 1.3, 1.2, 1.4, and 1.5 points, and PPVT-8 decreased by 0.9, 0.8, 5.4, 5.6, and 9.3 points. Conclusions Early life adversities negatively impact cognitive development as soon as in early and mid-childhood. Key messages Adversities in early infancy may determine childhood development. Since adulthood outcomes are directly related to childhood development, addressing early adversities before they get worse may help to successfully manage a society’s future.

A framework linking farming resilience with productivity: empirical validation from Poland in times of crises

Farming sectors’ resilience has been built over decades with the aid of policies and institutions. However, its actual standing can be assessed in times of crises when farms have to overcome particular challenges. We use a large-scale farming sectors dataset FADN spanning 2006–2015 in which two major economic crises occurred—the global economic crisis of 2008 and the Russian embargo of 2014—to exemplify our approach to resilience’s assessment based on the Polish farming sectors. We introduce a distinction between “potential resilience” versus “revealed resilience” where the former is assessed based on resilience capacities (robustness, adaptability and transformability), while the latter is assessed based on the observed decomposition of total factor productivity (TFP) changes in response to the adverse economic shocks. Hence, the proposed framework directly links productivity with the two types of resilience. We applied the Färe-Primont method of TFP decomposition, into technological change and various types of efficiency changes and a detailed farm survey to distinguish between the drivers of technological changes in each farming sector such as specific innovations and ecosystem services. Our findings show that farms differ in their revealed resilience both among the sectors and between two different shock events. Only field crop farms and granivores farms (pig and poultry) maintained their resilience to both crises, staying robust and/or adaptable. The former had the most productive technology and were leaders in applying innovations while the latter were second best in innovations and fairly good in their application of ecosystem-based services into their technology. Other farm types failed to be resilient to the first crisis but proved robust during the second. The outcomes of the study have implications for sustainability oriented policies.

Unequal worker exposure to establishment deaths

It is well understood that adverse economic shocks affect workers nonuniformly. We explore a new channel through which unequal employment outcomes may emerge during a downturn: displacement through the extensive margin of establishment deaths. Intuitively, workers who are concentrated in less resilient establishments prior to an economic decline will be disproportionately affected by its onset. Using rich administrative employment and establishment data for the United States, we show that Black workers bore the brunt of the Great Recession in terms of within-industry employment changes arising from establishment deaths. This finding has important implications for the evolution of worker disparities during future downturns.

Art as Collateral

High market values and the recognition of its investment potential have made art a source of collateral for loans. Firms specializing in art lending have emerged to serve this market. This study explores the effect of regional variations in economic and financial conditions on art-backed lending activities. The authors show that demand for art loans increases when the economy experiences a downturn and liquidity needs are high. They compare the demand for art-secured loans with home equity loans and test a pecking order theory for the borrowing of high-net-worth individuals. The findings suggest that art as substitute collateral is increasingly used when home equity loans are difficult to obtain. <b>Key Findings</b> ▪ With the expansion of the high-end market for art and increased attention to its economic value in recent years, art has become an asset that can serve as loan collateral. The Uniform Commercial Code, under which debtors retain possession while creditors can register their security interest in the collateral, may also facilitate some of the art-backed lending in the United States. ▪ Using various regional economic performance measures, this study shows that some collectors borrow when the economy does not perform well. This supports the hypothesis that art may serve, in certain circumstances, as emergency collateral to smooth adverse economic shocks. ▪ Art is used as collateral when home equity loans are difficult to obtain and when housing prices decline. This is also consistent with the hypothesis that collectors borrow from nonbank creditors in times of financial distress to meet liquidity needs.

Public Debt Management and The Country’s Financial Stability

Abstract The government debt portfolio is usually the largest financial portfolio in the country. It often contains complex and risky financial structures and can generate significant risk to the state budget and the country’s financial stability. Therefore, governments are required to have sound risk management and sound public debt structures to limit exposure to market risk, debt financing or rolling risk, liquidity risk, credit, settlement and operational risk. In recent years, the debt market crises have highlighted the importance of sound public debt management practices and related risks, and the need for an effective and well-developed domestic capital market. This may reduce the vulnerability of the economy to adverse economic and financial shocks. However, it is also important for the government to maintain a macroeconomic policy that ensures sound fiscal and monetary management. The aim of the research is to present the theoretical and practical aspects of extremely important issues such as public debt management and to indicate the most important implications for the financial stability of the country on the example of the Polish economy. The study uses a research method based on literature studies in the field of macroeconomics, economic policy and finance, as well as statistical analysis of the studied phenomenon. Results of research indicate that effective public debt management can reduce the economy’s vulnerability to financial threats, contribute to the financial stability of the country, maintain debt stability and protect the government’s reputation among investors.

The Great Recession and Physical Activity of Young Adults.

Objective. Since physical inactivity has been identified as a pandemic and a public health priority, it is crucial to understand the role of adverse economic shocks on physical activity. In this study, we examine the impact of job losses during the U.S. Great Recession from January 2008 to June 2009 on the likelihood of physical activities of young adults. Methods. We use individual fixed effects estimation on a nationally representative longitudinal data from 2005 to 2015, the Panel Study of Income Dynamics (PSID), to examine the impact of job losses of young adults, their spouses, and their parents on physical exercise of young adults aged 18 to 27 years. Results. Own job losses during the Great Recession led to a decrease in the likelihood of physical exercise among young adults. However, job losses of parents and partners had no effect on the likelihood of young adults' physical exercise. Conclusion. Our findings indicate a negative impact of the recession on physical activity of young adults and highlights the need for policymakers to consider the impact of major economic downturns on the physical activity of young adults.

World economy development forecast during the COVID-19 pandemic

More than a decade after the global financial crisis, the world is fighting against the health and economic implications of a new deep crisis caused by the COVID-19 pandemic. Advanced economies entered this crisis with historically low interest rates and public debt whose amount was higher than in the 1960 years. They will recover with a higher amount of public debts. Based on pre-pandemic analysis, this article explores options for policymakers to respond to adverse economic shocks. In 2020-2021, according to the International Monetary Fund, the losses of the world economy will be $ 9 trillion. The gross domestic product (GDP) of Russia will decline by 5.5%. In 2021, the GDP of all countries will grow. In general, the developing economies and expanding markets will lose 1% of GDP in 2020, and in 2021, it will be 6.6%. In 2020, the world trade volume will decline by 11%. The depth and duration of the economic downturn will depend on many factors, including the virus behavior, the public health response, and economic interventions.