Supply Elasticities Research Articles

Understanding the Estimation of Oil Demand and Oil Supply Elasticities

This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models. I not only summarize the state of the literature, but also draw attention to a number of econometric problems that have been overlooked in this literature. Once these problems are recognized, seemingly conflicting conclusions in the recent literature can be resolved. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the dominant driver of the real price of oil. The focus of this paper is not only on correcting some misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers.

Monetary Policy and US Housing Expansions: The Case of Time-Varying Supply Elasticities

We challenge the assumption in the literature of constant housing supply elasticities across housing expansions. Using a time-varying parameter (TVP)-VAR model on monthly US data since the early 1990s, we find that the response of housing supply to an expansionary monetary policy shock relative to the response of house prices has declined substantially since the Great Financial Crisis (GFC). Our findings are consistent with research suggesting that land-use regulation has tightened. Absent major reversions in regulation, our results point to a post-COVID-19 housing recovery characterised by a sluggish response of housebuilding to demand, but a relatively stronger response of house prices.

Irrigation water pressure, supply elasticity and grain production structure based on heterogeneous coefficient Nerlove model

Irrigation water pressure, supply elasticity and grain production structure based on heterogeneous coefficient Nerlove model

Understanding the Estimation of Oil Demand and Oil Supply Elasticities

This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models. I not only summarize the state of the literature, but also draw attention to a number of econometric problems that have been overlooked in this literature. Once these problems are recognized, seemingly conflicting conclusions in the recent literature can be resolved. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the dominant driver of the real price of oil. The focus of this paper is not only on correcting some misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers.

Housing Supply Elasticity and Growth: Evidence from Italian Cities

The paper examines the impact of housing supply elasticity on urban development. Using data for a sample of around one hundred Italian main cities observed over 40 years, we first estimate housing supply elasticities at the city level. Second, we show that differences in the elasticity of housing supply may determine the extent to which a demand shock translates into more intense employment growth or more expensive houses. To address endogeneity of housing supply elasticity, we exploit a synthetic measure of physical constraints to residential development as instrumental variable. We find that an exogenous increase in labour demand determines a rise in employment and housing prices; however, in cities with a less elastic housing supply the impact on economic growth is significantly lessened while the effects on house prices are greater.

Socio-economic Consequences of Globalization in Agriculture in Relation to Social Responsibility

Agriculture has allowed for people to settle in one place and stop moving for food. It made possible to survive and later trade. Agriculture was the main driver of the economy since the creation of the first states to the 20th century. In today’s globalized world, we consider an economically successful country where the industry dominates. Industry, compared to agriculture, offers greater opportunities for growth in gross domestic product. In addition to economic cycles, economic activities closely related to agriculture are also affected by climate fluctuations, pests, diseases, inadequate crops and others. Despite the fact that agricultural output is essential for life, agriculture has been on the second track. The stability and sustainable development of a country depends on the influence of various economic, non-economic and political factors. However, the low elasticity of agricultural production supply, dependence on natural conditions and the limited durability of production results can make agriculture a weak link in planning the further development of the country’s economy. The paper deals with the need for a socially responsible approach to agriculture and the identification of factors that can affect the stability of the economy, the sustainability of economic growth as well as the health of the population and the environment. Information for the preparation of this paper was drawn from the data of the Statistical Office, expert studies and economic literature. At the end of the paper is outlined the possible use of agriculture as a major industry in the context of solving some social problems.

A Stylized Model of the Oil Squeeze

The paper proposes a practical alternative to a traditional theory of storage, which is difficult to apply to oil markets due to structural differences, such as low-price elasticities of demand and supply, and the dominant role of oil as an investment asset. We model futures time spreads as a derivative of the observable state variable, oil inventories. Inventories, normalized by the storage capacity, are assumed to follow a mean-reverting stochastic process. The boundary condition at the futures expiry is specified by a pair of Dirac delta functions which correspond to the events of default by the futures trader when either oil inventory or the storage capacity are no longer available. The model is calibrated to data for Cushing, Oklahoma, the delivery location for WTI futures, and is used to analyze the market dynamics that led to negative oil prices. We argue that while the limitation of storage capacity was the initial catalyst leading to the event, the actual episode of negative prices was the result of the financial squeeze in the futures market.

State Dependence of Fiscal Multipliers: The Source of Fluctuations Matters

We develop a general theory of state-dependent fiscal multipliers in a framework featuring interaction between two empirically relevant goods market frictions: idle productive capacity and unsatisfied demand. Our key novel finding is that the source of economic fluctuations determines the cyclicality of fiscal multipliers. Policies that stimulate aggregate demand, such as government spending and consumption tax cuts, have multipliers that are large in demand driven recessions, but small and possibly negative in supply-driven downturns. On the other hand, policies that boost aggregate supply, such as cuts in taxes on labor income and firms’ payroll and sales, are ineffective in demand driven recessions, but powerful if the downturn is driven by supply factors. Spending austerity, implemented by a reduction in government consumption, can be the policy with the largest multiplier in severe supply-side recessions and demand-driven booms, provided elasticities of labor demand and supply are sufficiently low. We obtain modelfree empirical support for our theoretical predictions by using a novel econometric specification that allows us to estimate spending and tax cut multipliers in recessionary and expansionary episodes, conditional on those being either demand- or supply-driven.

Gender Wage Gap and Firm Market Power: Evidence from Chile

The main aim of this work is to explain the Chilean gender wage gap using a dynamic monopsony model to estimate the labor supply elasticities at the firm level. Our results suggest that the elasticities of labor supply to firms are small, which implies that firms have labor market power. We also found that depending on the especification, Chilean men would earn approximately 19% - 28% more than women as a result of the difference in labor supply elasticities by gender, ceteris paribus. Furthermore, we find that in the long run, the magnitude of between-firm differences in elasticities are higher than within-firm differences, which suggests that the gender wage gap is driven by structural factors that generate gender sorting to firms. Finally, using the same methodology, we find that the elasticities for a high-income countries (e.g. the United States) are higher than those obtained for a middle-income country (e.g. Chile) for both men and women, which suggests higher labor market frictions in middle-income countries. The main difference between USA and Chile comes from the low labor supply elasticity of Chilean women, which appears to be explained from their low recruitment elasticity from nonemploeyment.

Monopsony in Movers: The Elasticity of Labor Supply to Firm Wage Policies

Monopsony in Movers: The Elasticity of Labor Supply to Firm Wage Policies

Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags

The income elasticity of labor supply is a central parameter of many economic models. We test how labor supply and effort in northern Ghana respond to exogenous changes in income and wages using a randomized evaluation of a multi-faceted grant program combined with a bag-making operation. We find that recipients of the grant program increase, rather than reduce, their supply of labor. We argue that simple models with either labor or capital market frictions are not sufficient to explain the results, whereas a model that allows for a positive psychological productivity effect from higher income does fit our findings.

The Welfare Loss of Subsidies in Global Electricity Markets

Subsidies induce a market inefficiency by creating a deadweight loss, since supply and demand are out of equilibrium. In 2016, electricity subsidies were the largest component of the total global energy subsides, with an estimated 128 billion USD out of 287 billion USD. Electricity generation is also directly responsible for a quarter of global greenhouse gas emissions. Under baseline assumptions about supply and demand elasticities and employing the latest available data, we first estimate the welfare loss of global electricity subsidies and then estimate the global environmental costs imposed by electricity consumption. We find that the total annual deadweight loss worldwide in 2016 was 12.7 billion USD. Incorporating external costs stemming from excessive consumption, which is a result of prices that are less than the private marginal cost, leads to a total annual welfare loss of 44.6 billion USD. This number accounts for 4.8% of total electricity market value in electricity-subsidizing countries. Furthermore, we find that the worldwide electricity consumption imposes environmental costs of at least 652.8 billion USD annually; thus, the total annual costs in the global electricity markets are nearly 700 billion USD.

High-Dimensional Mixed-Frequency IV Regression

This paper introduces a high-dimensional linear IV regression for the data sampled at mixed frequencies. We show that the high-dimensional slope parameter of a high-frequency covariate can be identified and accurately estimated leveraging on a low-frequency instrumental variable. The distinguishing feature of the model is that it allows handing high-dimensional datasets without imposing the approximate sparsity restrictions. We propose a Tikhonov-regularized estimator and study its large sample properties for time series data. The estimator has a closed-form expression that is easy to compute and demonstrates excellent performance in our Monte Carlo experiments. We also provide the confidence bands and incorporate the exogenous covariates via the double/debiased machine learning approach. In our empirical illustration, we estimate the real-time price elasticity of supply on the Australian electricity spot market. Our estimates suggest that the supply is relatively inelastic throughout the day.

Global Capital and Local Assets: House Prices, Quantities, and Elasticities

Interconnected capital markets allow mobile global capital to flow into immobile local assets. This paper examines how foreign demand affects U.S. housing markets, and uses this demand shock to estimate local price elasticities of supply. Other countries introduced foreign-buyer taxes meant to deter Chinese housing investment beginning in 2011. We first show house prices grew 8 percentage points more in U.S. zipcodes with high foreign-born Chinese populations after 2011, subsequently reversing with the onset of the U.S.–China trade war. Second, we use international tax policy changes as a U.S. housing demand shock and estimate local house price and quantity elasticities with respect to international capital. We find that a 1% increase in instrumented foreign capital raises house prices at the zip code level by 0.27%, and housing supply by 0.004%. Finally, we use the two elasticities to construct new local house price elasticities of supply for the largest 100 CBSAs. These supply elasticities average 0.1 and vary between 0.02 and 0.7, suggesting that local housing markets are inelastic in the short run and exhibit substantial spatial heterogeneity.

Strategic Interactions and Price Dynamics in the Global Oil Market

In a simplified theoretical framework we model the strategic interactions between OPEC and non-OPEC producers and the implications for the global oil market. Depending on market conditions, OPEC may find it optimal to act either as a monopolist on the residual demand curve, to move supply in-tandem with non-OPEC, or to offset changes in non-OPEC supply. We evaluate the implications of the model through a Structural Vector Auto Regression (VAR) that separates non-OPEC and OPEC production and allows OPEC to respond to supply increases in non-OPEC countries. This is done by either increasing production (Market Share Targeting) or by reducing it (Price Targeting). We find that Price Targeting shocks absorb half of the fluctuations in oil prices, which have left unexplained by a simpler model (where strategic interactions are not taken into account). Price Targeting shocks, ignored by previous studies, explain around 10 percent of oil price fluctuations and are particularly relevant in the commodity price boom of the 2000s. We confirm that the fall in oil prices at the end of 2014 was triggered by an attempt of OPEC to re-gain market shares. We also find the OPEC elasticity of supply three times as high as that of non-OPEC producers.

Banks, Money, and the Zero Lower Bound on Deposit Rates

We develop a New Keynesian model where all payments between agents require bank deposits through deposits-in-advance constraints, bank deposits are created through disbursement of bank loans, and banks face a convex lending cost. At the zero lower bound on deposit rates (ZLBD), changes in policy rates affect activity through both real interest rates and banks’ net interest margins (NIM). At estimated credit supply elasticities, the Phillips curve is very flat at the ZLBD, because inflationary pressures increase NIM. This strongly increases credit and thereby output, but it dampens inflation by relaxing price setters’ credit rationing constraint. At the ZLBD, monetary policy has far larger effects on output relative to inflation, and Taylor rules stabilize output less effectively than rules that also respond to credit. For post-COVID-19 policy, this suggests urgency in returning inflation to targets, avoidance of negative policy rates, and a strong influence of credit conditions on rate setting.

The Propagation of Local Credit Shocks: Evidence from Hurricane Katrina

A local credit shock, induced by hurricane Katrina, propagated through banks’ internal networks to produce real and credit markets’ effects in distant regions. Driven by abnormal mortgage and housing demand in Katrina-hit areas, financially constrained multi-market banks reallocated resources towards the damaged areas leading to a credit tightening in the undamaged local markets. Depending on their housing supply elasticity, local housing markets in the undamaged regions responded to this credit disruption with a mix of housing prices and housing supply declines. These spillovers depended on undamaged markets’ financial linkages to disaster areas. In the undamaged regions, community banks, being local and unexposed to disaster areas, partially insulated their markets from these spillovers.

Do Fintech Lenders Fill the Credit Gap? Evidence from Local Mortgage Demand Shocks

After exogenous demand shocks caused by natural disasters, FinTech lenders are more responsive to increased demand for reconstruction mortgages than traditional banks and non-FinTech shadow banks. Both FinTech and traditional banks increase credit supply, but FinTech supply is more elastic without increases in risk-adjusted interest rates or delinquency rates. Comparing lending supply channels, banks respond to regulatory incentives to lend to damaged areas, whereas FinTech lenders supply more credit when traditional banks rely more on balance sheet financing and physical branch networks. Compared to traditional banks, FinTech lenders increase supply elasticity more aggressively in response to local competitive pressure.

Commuting Time and the Gender Gap in Labor Market Participation

This paper investigates the contribution of increasing travel times to the persistent gender gap in labor market participation. In doing so, we estimate the labor supply elasticity of commuting time from a sample of men and women in US cities using microdata from the Census for the last decades. To address endogeneity concerns, we adopt an instrumental variables approach that exploits the shape of cities as an exogenous source of variation for travel times. Our estimates indicate that a 10 minutes increase in commuting decreases the probability of married women to participate in the labor market by 4.6 percentage points. In contrast, the estimated effect on men is small and statistically insignificant. We also find that women with children and immigrant women originating from countries with more gendered social norms respond the most to commuting time variations. This evidence suggests that the higher burden of family responsibilities supported by women may magnify the negative effect of commuting on their labor supply. From our findings, we conclude that the increasing trend in travel times observed in the US and in many European countries during the last decades may have contributed to the persistence of gender disparities in labor market outcomes.

Social Security, Labor Supply and Health of Older Workers: Quasi-Experimental Evidence from a Large Reform

We study the effects of public pension systems on the retirement timing of older workers and, in turn, the health consequences of delaying retirement by those workers. Causal inference relies on a social security reform in Israel that shifted payments from husbands to their (non-working) wives, thereby substantially reducing the implied tax on the husband's employment while keeping overall household wealth constant. Using administrative social security data, we estimate extensive-margin labor supply elasticities w.r.t. the average net-of-tax rate of about 0.43 for men over 65. Using the reform to instrument for employment, we find that working an additional full year at old age decreases longevity. This mortality effect occurs after age 75 and is driven by workers holding blue-collar jobs. Finally, we evaluate the effect of the reform on earnings. The results imply a small value for an additional year of life, suggesting that workers underestimate the health cost of employment at older ages.