Aggregate Demand Shocks Research Articles

Asymmetric influence of oil demand and supply shocks on meat commodities

We analyze how different types of oil shocks impact the prices of six meat commodities: beef, lamb, pork, poultry, fish, and shrimp. Proceeding in two stages, we first decompose variations in the real oil price into oil supply, aggregate demand, and oil-specific demand shocks using a recursive structural vector autoregression. Then, we examine the asymmetries in the effects of these three types of shocks on meat prices using nonlinear autoregressive distributed lag models. There are three main findings. First, oil supply shocks and oil-specific demand shocks affected meat prices in the short and long run—aggregate demand shocks were largely irrelevant. Second, asymmetries in the effects of oil price shocks were present mainly in the long run; there was limited evidence of these asymmetries in the short run. Third, the effects of the three types of shocks differed between the six meat prices. These findings suggest that the conventional approach to analyzing the response of agricultural prices to oil price shocks will neglect the heterogeneity in these responses to various categories of oil price shocks. While studying the effects of a composite of oil price shocks on agricultural prices is informative, exploring the impacts of various categories of oil price shocks will be more insightful, presenting a more nuanced view of the associations between oil and agricultural prices.

Do Oil Shocks Affect Financial Stress? Evidence from Oil-Exporting and -Importing Countries

In recent years, there is increasing attention to examining the relationship between oil prices, financial markets, and the economy. Relatively little is known about the dynamic relationship between structural oil shocks and financial market stress of countries, which are majorly dependent on oil price fluctuations. This paper examines the impact of structural oil shocks (oil supply shocks, global aggregate demand shocks, speculative shocks, and other oil shocks) on the financial stress of major oil-exporting and-importing economies. In this study, we construct a financial stress index and using a structural vector autoregression model, we investigate the effects of oil price shocks on the financial stress of major oil-exporting and importing economies. We find evidence that global demand shocks, followed by speculative demand shocks, have significant impacts on financial stress. Furthermore, the US subprime crisis has a significant bearing on the response of the financial stress index to structural oil shocks. The magnitude of oil price shocks on financial stress has subdued during the post-crisis period.

The pass‐through effects of oil price shocks on sovereign credit risks ofGCCcountries: Evidence from theTVP‐SVAR‐SVframework

AbstractWe implement a two‐stage methodology based on the structural vector autoregressive and time‐varying parameter vector autoregressive models to examine the time‐varying effect of distinct types of oil‐price shocks on sovereign credit risks measured by credit default swap (CDS) spreads in Gulf Cooperation Council countries. Using monthly data for the period from May 2011 to February 2022, our results show time‐varying responses to structural oil shocks in the short‐ and medium‐run periods, with more fluctuations in responses detected over the full sample period in the former. Overall, we detect a break in the contagious impacts of oil shocks during and in the aftermath of, the 2014–2015 oil crisis and COVID‐19 crisis. Specifically, the Bahraini market is found to exhibit a positive (negative) reaction to the oil supply shocks (OS) and oil market‐specific demand shocks (OSD) throughout the pandemic period. Furthermore, we uncover a transient response from the Saudi and Qatari CDS spreads to the aggregate demand shocks (ADS) and the OSD over the full sample period, indicating the need for portfolio rebalancing. In the UAE, we detect a positive impact over the three sampled years of OSD since 2011. Moreover, a notable decoupling pattern continues to appear between short‐ and medium‐term innovations in the ADS. Our results suggest adopting more conservative trading in the CDS markets while understanding the oil price and the economic state. The complexity of the trading strategy should also depend on the target Gulf market itself and that seems essential when it comes to investing in Qatar and Saudi Arabia.

Pessimism, Disagreement, and Economic Fluctuations

Abstract The pessimistic bias and the cross-sectional dispersion of households’ subjective beliefs heighten during recessions. We provide empirical evidence for a dominant non-inflationary aggregate demand shock that accounts for the bulk of business-cycle fluctuations not only in real quantities but also in (1) pessimism—to what degree households are more pessimistic than the rational expectation benchmark and (2) disagreement—the cross-sectional dispersion of households’ beliefs. To rationalize the empirical findings, this paper develops a theory of ambiguity-driven business cycles, where the Bayesian formulation of the ambiguity shock can generate positive co-movements across real quantities together with counter-cyclical pessimism and disagreement within the real business-cycle framework. Our theory reproduces the salient features of the business cycles extended with survey data on households’ expectations. Quantitatively, the ambiguity shock alone accounts for a significant fraction of the business-cycle fluctuations in pessimism, disagreement, and real quantities.

Is the exchange rate a shock absorber? The shocks matter

This paper provides a new perspective on the relationship between exchange rate fluctuations and business cycle dynamics by focusing on the underlying macroeconomic shocks. We study how domestic and global macroeconomic shocks, which we identify using zero and sign restrictions, are transmitted through exchange rate adjustments in 8 small open economies. Based on a counterfactual analysis, we find that the capacity of the exchange rate to absorb business cycle fluctuations depends on the underlying shock and differs across the short and the medium run. Following domestic aggregate demand shocks, endogenous exchange rate dynamics stabilize real GDP, primarily in the short run, and inflation dynamics over the medium run, while they amplify the effects of monetary policy shocks. Following domestic aggregate supply as well as global shocks the exchange rate exerts only small effects.

More than just supply and demand: Macroeconomic shock decomposition in Croatia during and after the transition period

This paper separates macroeconomic shocks into external and domestic aggregate demand and supply shocks in Croatia during and after the transition period using a Bayesian SVAR model. The standard decomposition into aggregate demand and supply shocks covers important information on external sources of economic fluctuations. We find that domestic shocks were a dominant source of fluctuations during the transition period from 1992 to 2000. External shocks increased their importance after 2000, becoming the dominant source of fluctuations with the Global financial crisis. International comparison with other EU post-transition countries shows that short run GDP fluctuations are best explained by domestic aggregate supply shocks in 9 out of 11 analyzed countries, including Croatia. However, in the medium run, GDP fluctuations are dominantly explained by external aggregate demand shocks in 8 out of 11 countries, including Croatia. Inflation in Croatia is driven by external shocks both in the short- and medium run.

On the transmission of oil supply and demand shocks to CO2 emissions in the US by considering uncertainty: A time-varying perspective

In an economic context increasingly governed by structural changes, crises, and uncertainty, our understanding of the transmission of oil price shocks to real economic activity and the resulting effects on CO2 emissions is found to evolve over time. Our understanding is also found to evolve when considering the sources of oil price fluctuations as emanating from the supply or demand side. So far, there is still few answers provided by the literature on how economic and policy uncertainty influences the response of CO2 emissions to different sources of oil price shocks. This paper tries to investigate this ‘missing link’ by estimating the time-varying transmission of oil supply and demand shocks to CO2 emissions in the US, while considering the simultaneous effect of uncertainty. Using monthly data covering a period including the Covid-19 health crisis, a two-step estimation procedure is adopted: before constructing a time-varying parameter structural vector autoregression model with stochastic volatility (TVP-SVAR-SV), a structural VAR model (SVAR) is implemented to decompose oil price shocks in four structural shocks namely: oil supply shock, aggregate demand shock, domestic demand shock and oil-specific demand shock. Estimation results and robustness tests show that the level of uncertainty shapes the transmission of oil price shocks to CO2 emissions. Oil supply and oil-specific demand shocks impact negatively CO2 emissions mostly when uncertainty is low. A high uncertainty level leads to a perverse positive impact of aggregate demand shocks on CO2 emissions. Interestingly, CO2 emissions are found to increase during low levels of uncertainty in response to domestic demand driven oil price shocks. This finding may be due to the expansive economic policies enforced to decrease uncertainty and increase consumption in reaction to domestic demand shocks. These results imply that workable solutions targeting an optimal level of CO2 emissions should not only consider different sources of oil price fluctuations but also the level of uncertainty. Discarding the level of uncertainty may lead to a sub-optimal calibration of the regulatory and fiscal measures aiming to protect the environment against different sources of oil price shocks and to adapt these measures to the time horizon of carbon emissions responses.

Rigid production networks

This paper studies a production network model with quantity rigidities and informational frictions, where (i) firms may be restricted in how effectively they can adjust (some or all of) their intermediate input quantities in response to changes in the economic environment and (ii) they need to choose their quantities under incomplete information about the realizations of shocks. Our characterization results show that these two frictions lead to a reduction in aggregate output, as firms may find it optimal to rely more heavily on less volatile suppliers, even if it comes at the cost of forgoing more efficient ones. We also find that the interaction between informational frictions and quantity rigidities dampens the impact of productivity and aggregate demand shocks on aggregate output, while increasing the inflationary effects of positive shocks to nominal aggregate demand. The magnitudes of these effects depend on the distribution of the two frictions over the production network.

Propagation of shocks in an input-output economy: Evidence from disaggregated prices

Using disaggregated industry-level data, this paper empirically evaluates predictions for the cross-sectional price change distribution made by input-output models with sticky prices. The response of prices to shocks is found to be consistent with the price sensitivities predicted by the input-output model. Moreover, moments of the sectoral price change distribution vary over time in response to the evolution of the network structure. Finally, through a quantitative analysis, demand and supply shocks are disentangled during the pandemic period. Counterfactual analyses show that sectoral supply shocks, aggregate demand shocks and the production network structure contributed significantly to the inflation surge in 2021–2022.

Quantifying the Inflationary Impact of Fiscal Stimulus under Supply Constraints

This paper builds on Baqaee and Farhi (2022) and di Giovanni et al. (2022) to quantify the contribution of fiscal policy on US inflation over the December 2019 to June 2022 period. Model calibrations show that aggregate demand shocks explain roughly two-thirds of total model-based inflation and that the fiscal stimulus contributed half or more of the total aggregate demand effect.

Oil prices uncertainty, endogenous regime switching, and inflation anchoring

SummaryUsing a novel approach to model regime switching with dynamic feedback and interactions, we extract latent mean and volatility factors in oil price changes. We illustrate how the volatility factor constitutes a useful measure of oil market risk (or oil price uncertainty) for policy makers and analysts as it captures uncertainty not reflected in other economic/financial uncertainty measures. Then, in the context of a VAR, we investigate the role of oil price uncertainty in driving inflation expectations and inflation anchoring. We show that shocks to the mean factor lead to higher expected inflation and inflation disagreement among professional forecasters and households. In contrast, shocks to the volatility factor act as aggregate demand shocks in that they result in lower expected inflation, yet they do increase disagreement about future inflation among professional forecasters and, especially, among households. We also provide econometric evidence suggesting the proposed endogenous volatility switching model can outperform other regime switching models.

Oil price shocks and inflation: A cross-national examination in the ASEAN5+3 countries

We test interaction between the oil price shocks and inflation in the ASEAN5+3 countries utilizing 35 years of monthly data beginning in 1987–2022. We show that when the COVID-19 pandemic is factored into our sample, oil-specific demand shocks and aggregate demand shocks had a significant impact on inflation in these countries. These findings hint that the COVID-19 pandemic is likely the fundamental cause of the inflationary impact of these shocks. The impact of rising inflation sparked by shocks emanating from oil-specific demand and aggregate demand is evident in Malaysia, Singapore, Thailand, the Philippines, and Japan. We discover evidence that inflation responds asymmetrically to oil price shocks, depending on whether the shocks are positive or negative. Our empirical findings have significant policy implications for policymakers as they provide a reasonable explanation for the ASEAN5+3 countries' inflationary responses to various oil price shocks.

Comparing the inflationary impacts of uncertainty between advanced and emerging economies

ABSTRACT This paper quantifies the impact of uncertainty shocks on inflation by distinguishing their effect through aggregate supply and demand adjustments for 34 advanced and emerging economies. Methodologically, this quantification starts by identifying structural aggregate supply and demand shocks and evaluating their impacts on output growth and inflation. Results show that uncertainty shocks prompt responses on both sides of the market by shifting aggregate demand and supply curves leftward. The aggregate demand leftward shift causes similar deflationary pressures across all countries. However, the inflationary pressures from the aggregate supply contraction are significantly larger in emerging than in advanced economies.

Time-Varying Relation between Oil Shocks and European Stock Market Returns

This paper considers a time-varying parameter vector autoregression model to analyze the varying impact of three types of structural oil shocks (the supply-side shock, the aggregate demand shock, and the oil-specific demand shock) on the European stock market since the 1990s. Our findings show that the three types of oil shocks heterogeneously influence stock market returns in the euro area, and that this influence considerably changes over time during the period considered. First, an unexpected increase in oil supply appears to exert a positive but generally declining effect in the period before the Global Financial Crisis (GFC) of 2007–2009, which descends into negative values after the GFC. Second, an unanticipated increase in aggregate demand triggers a generally positive effect on stock market returns in the euro area. However, in the period from 2003 to 2005, stock market returns responded negatively, which could be attributed to the so-called growth-retarding effect. Third, an unexpected increase in oil-specific demand instigates a negative response in the pre-GFC period (considering the response 4–5 months after the shock), although this changes to a positive effect thereafter. Interestingly, irrespective of the origin of oil price fluctuations, oil price increases are associated with positive European stock market returns after the GFC. This signals a greater degree of oil market financialization.

Inflationary Pass-through Effects of Oil Price Shocks on the Zambian Economy (1985–2019)

This study explores the effect of disaggregated oil price shocks on Zambia’s historic headline inflation rates. To quantify the contemporaneous impact of oil price shocks on inflation, a Structural Vector Autoregressive Model (SVAR) is utilised, which is supplemented with Impulse Response Functions (IRFs), Granger Causality Tests and Forecast Error Variance Decomposition (FEVD). After satisfying the cointegration criteria, long-run relationships are examined using the Vector Error Correction Model (VECM).The findings show that decomposed oil price shocks do not have a short-run contemporaneous impact on inflation at the 5% level and that oil price shocks do not Granger-cause inflation. The insignificance of the short-run inflationary pass-through effect is attributed to Zambia’s historic price controls, fuel subsidies, exchange rate controls and increased credibility of monetary policy. Notably, of the three types of oil price shocks, FEVD results show that global aggregate demand shocks are attributed for the largest variation in Zambia’s inflation rates, i.e. 1.8%. Long-run analysis using VECM shows that global aggregate demand and oil supply shocks both have a significantly negative long-run impact on inflation, while oil-specific demand shocks have a significantly positive impact on inflation. The speed of adjustment of inflation back to equilibrium after a short-run deviation is shown to be significant and monotonic.

Detrended cross-correlations analysis between oil shocks and world food prices

PurposeThis paper aims to investigate the relationship between oil price shocks and world food prices between 1974 and 2018.Design/methodology/approachThe authors use the SVAR model to disentangle the oil price into supply, aggregate demand and oil-specific demand shocks and apply the detrended cross-correlations analysis to measure the association between oil price shocks and food returns/volatility and analyze contagion effects between oil and food markets.FindingsThe results show that the correlations between oil and food prices depend on whether oil prices changes are driven by supply or demand shocks. Particularly, food returns (volatility) are positively (negatively) more dependent on the oil price changes driven by aggregate demand (oil specific demand) shocks. Further analysis dealing with contagion analysis between oil and food markets shows a contagion effect during the food crisis of 2006–2008. Oil-specific demand shocks are the main source of this phenomenon.Research limitations/implicationsThis study differentiates itself from the previous literature by simultaneously disentangling oil price into supply, aggregate demand and oil-specific demand-driven shocks and evaluating the cross-correlations between each shock type and food returns/volatility. Specifically, this study has the originality of detecting the main source of contagion effects between oil and food markets over the food crisis of 2006–2008.Practical implicationsThe results of this study are important for policymakers and investors. They should account for the oil price fluctuations differently depending on whether the oil price shocks are driven by the demand or supply side. Moreover, they should anticipate an increase (decrease) in food prices due to a positive (negative) oil shock. In addition, special attention should be accorded to the world oil demand. Finally, when a food crisis occurs, markets operators should focus more on the specific oil-demand shocks, as it is the most contributor to possible contagion effects between oil and food markets.Originality/valueThis study differentiates itself from the previous literature by simultaneously disentangling oil price into supply, aggregate demand and oil-specific demand-driven shocks and evaluating the cross-correlations between each shock type and food returns/volatility. Specifically, this study has the originality of detecting the main source of contagion effects between oil and food markets over the food crisis of 2006–2008.

The role of crude oil demand and supply shocks on exchange rates: empirical evidence from South Korea

ABSTRACT The primary contribution of the present paper is to explicitly take into consideration the role that the three different components of crude oil shocks – oil supply shocks, aggregate demand shocks, and oil-specific demand shocks – when studying the nexus between oil price shocks and the South Korean won (KRW). We discover that oil demand shocks have had significant impacts on KRW over the past two decades: that is, an upsurge in oil prices driven by positive shocks in aggregate demand and oil-specific demand appears to appreciate KRW. However, oil supply shocks turn out to have negligible impacts. We also unveil that two oil demand shocks seem to asymmetrically influence KRW in the short run.

Optimal carbon tax rates in a dynamic stochastic general equilibrium model with a supply chain

This study investigates the role of the production supply chain in the choice of climate policies. We construct an environmental dynamic stochastic general equilibrium (E-DSGE) model that features multiple stages of production and different types of productivity shocks. Existing E-DSGE models for climate policy evaluation assume a single production stage. We find that the optimal carbon tax rates in all production stages are procyclical to aggregate supply shocks and countercyclical to aggregate demand shocks; however, if the shock arises from a particular production stage, the implied optimal carbon tax rates vary across stages and depend on the nature of the shocks. • We construct an E-DSGE model with a supply chain. • The effects of industry-specific carbon taxation in a supply chain are asymmetric. • Optimal carbon tax rates are procyclical to aggregate supply shocks. • Optimal carbon tax rates are countercyclical to aggregate demand shocks. • The optimal carbon tax rate’s cyclicality to industry-specific shocks is ambiguous.

Supply and demand shocks in the global oil market: How much do they matter for exchange rates in OPEC members?

The current article uses the SVAR and ARDL methodologies to study the dynamic responses of exchange rates for OPEC's 13-member countries to oil supply shocks, aggregate demand shocks, and oil-specific demand shocks. We discover that the timing and the direction of the responses of the OPEC currencies appear to differ with the cause of the oil price shocks. We also reveal that the effects of the three oil shocks could be viewed as a short-run phenomenon for the OPEC currencies.

Financial Conditions for the US: Aggregate Supply or Aggregate Demand Shocks?

Financial Conditions for the US: Aggregate Supply or Aggregate Demand Shocks?