Expansionary Periods Research Articles

Inflationary dynamics of labour market activity: Evidence from the Czech Republic

This paper provides an in-depth investigation into the intricacy of inflation dynamics in the Czech Republic, with particular emphasis on the influence exerted by labor market activity. The research employed principal component analysis and the local projections methodology proposed by Jorda (2005) in the context of the Phillips curve framework, followed by the extension of the analysis via the introduction of a nuanced state dependence dimension that recognizes that the impact of labor market activity on inflation may be contingent upon the broader economic situation. Our findings revealed the statistically significant impact of labor market activity on inflation. Specifically, a one standard deviation increase in the labor market activity component leads to an accumulated increase in inflation of approximately 3 percentage points over a three-year horizon. Our non-linear model uncovered the pivotal interaction between state dependence and the impact on inflation. The findings revealed that during expansionary periods, labor market pressures can be effectively managed for a limited period, albeit with a slight escalation in prices. However, over an extended period, the labor market is susceptible to encountering constraints that lead to markedly higher inflation rates - almost twice as high as those observed during recessionary periods. We subjected our benchmark results to extensive robustness verification.

Time-Varying Drivers of Stock Prices

This paper provides novel evidence of the time-varying roles of subjective expectations in explaining stock price variations. Cash flow expectations matter more during times of financial uncertainty and recessions, especially among the hardest-hit industries such as Telecommunications during the dot-com bubble, Financials during the Great Recession, and Healthcare during the COVID-19 pandemic. Conversely, discount rates explain more price variations during expansionary periods. Inflation expectations, while accounting for more than half of price fluctuations in high-inflation environments, play a negligible role otherwise. Finally, factor returns tend to move against earnings growth expectations under low financial uncertainty but move in sync with earnings growth expectations when financial uncertainty is high.

Job Creation and Job Destruction in Indian Manufacturing

The reallocation of jobs is crucial in determining the movement of workers, the unemployment rate, the wage dynamics, the life cycle of firms and industries and the aggregate productivity growth. This article analyses job reallocation in terms of simultaneous establishment-level job creation and job destruction in Indian organised manufacturing. The study employs longitudinal data from the Annual Survey of Industries (ASI) from 2004–2005 to 2014–2015 and the methodology stated in Davis and Haltiwanger (1992) to analyse job reallocation. During the expansionary periods, job creation and job destruction were rising, while during the contractionary period from 2008 to 2009 onwards, job creation declined, whereas job destruction was constant. The reallocations of jobs varied substantially across the narrow heterogeneous sectors defined by observable plant characteristics. The rate of these simultaneous job creation and destruction processes is high for many establishments and accounts for a significant portion of worker reallocation. However, the consistency of these newly created and destroyed jobs is low. Theories like ‘passive learning’ and ‘between-sector employment shifts’ partially explain this phenomenon of high job reallocation. The study provides useful policy insights to improve manufacturing employment during the process of frequent job creation and destruction, especially in a developing economy. JEL Codes: J01, J23, J21, J40, F63

Monetary policy shock and corporate innovation: Evidence from China

This paper investigates whether and how monetary policy shock (MPS) affects corporate innovation using a large sample of 3,082 Chinese listed firms over the period 2007–2019. We provide robust evidence that firms increase their innovative activities when faced with MPS. Further analyses show that firms in competitive industries or with less market power are more inclined to increase innovation in the event of MPS, and that the influence of MPS on corporate innovation is more pronounced for firms with more growth opportunities or better financial conditions. We also find that firms tend to increase innovation to a larger extent in expansionary periods than in contractionary ones.

A test of the tourism Dutch disease hypothesis in developing countries

In this study, we examine whether tourism can appreciate real exchange rates in developing countries. We use Fiji as a case study with annual data from 1980 to 2019. We apply the recently developed Fourier ARDL model which automatically corrects for the effects of structural breaks. The results indicate that tourism entails real exchange rate appreciation pressure. This effect is present with positive tourism shocks in expansionary periods. Tourism exerts a marginally stronger downward pressure on real exchange rates with negative tourism shocks during recessionary periods. Negative tourism shocks in expansions and positive tourism shocks in recessions do not influence real exchange rates. The implication is that whether tourism leads to an appreciation of real exchange rates depends on the relevant phase of the business cycle.

State-dependent intertemporal risk-return tradeoff: Further evidence

We suggest that the intertemporal risk-return tradeoff is not necessarily positive but rather state dependent. We further explore the state dependent risk-return relation by examining how the positive risk-return relation is distorted in response to various market conditions, including extreme price changes, differing levels of investor sentiment, the introduction of stock options, and throughout business cycles. The tendency for uninformed investors to be optimistic (pessimistic) in response to good (bad) market news cause overpricing (underpricing), and the resulting trade activity of arbitrageurs that distorts the positive risk-return tradeoff, is documented consistently across these environments. We find that the attenuation (reinforcement) of the positive risk-return relation under investors’ optimistic (pessimistic) expectations is stronger in high (low) sentiment periods, in the presence of extreme returns, in the period after stock options became available, and during expansionary periods. We argue that the asymmetric intertemporal risk-return relation is a consequence of rational arbitrageurs’ trading to exploit mispricing through the selling of overpriced stocks conditional on good news and buying underpriced stocks conditional on bad news.

Single-cell and spatial analyses reveal a tradeoff between murine mammary proliferation and lineage programs associated with endocrine cues

Although distinct epithelial cell types have been distinguished in glandular tissues such as the mammary gland, the extent of heterogeneity within each cell type and the degree of endocrine control of this diversity across development are incompletely understood. By combining mass cytometry and cyclic immunofluorescence, we define a rich array of murine mammary epithelial cell subtypes associated with puberty, the estrous cycle, and sex. These subtypes are differentially proliferative and spatially segregate distinctly in adult versus pubescent glands. Further, we identify systematic suppression of lineage programs at the protein and RNA levels as a common feature of mammary epithelial expansion during puberty, the estrous cycle, and gestation and uncover a pervasive enrichment of ribosomal protein genes in luminal cells elicited specifically during progesterone-dominant expansionary periods. Collectively, these data expand our knowledge of murine mammary epithelial heterogeneity and connect endocrine-driven epithelial expansion with lineage suppression.

Oil price shocks and stock–bond correlation

This paper investigates the role of oil as a determinant of the US stock–bond correlation. The analysis uses monthly data over the period from February 1990 to July 2021. We examine the impact of oil shocks, using the Ready (2018) method, alongside a range of macroeconomic variables on the nature of stock–bond dynamic correlation. Our main findings demonstrate that during recessionary periods, the stock–bond correlation is adversely and statistically explained by oil supply shocks, and that correlation tends to statistically diverge from that of it is counterpart during expansionary periods. In addition, demand shocks are more pronounced in periods of pessimistic investor sentiment, whereas supply and risk shocks appear during optimistic periods. From a risk management standpoint, a backtesting exercise shows that the incorporation of supply and demand shocks generally improves the forecast of portfolio volatility under various portfolio weighting schemes and market conditions. A time-varying hedging exercise also reveals that accounting for both demand and supply shocks reduces the cost of hedging, mainly following major crisis periods. The contribution of shocks appears most with a long position in the bond market after the 2014 oil crisis period. Our main results remain the same after performing a set of the robustness checks.

The time-varying risk–return trade-off and its explanatory and predictive factors

We analyze the intertemporal dimension of the risk–return trade-off and determine the drivers that better explain and predict its evolution. To this end, we propose a novel estimate of the relationship between return and risk where we generate time variation in the trade-off without conditioning the estimates to any state variable. We compare this dynamic approach with time-invariant or state-dependent estimates and observe that our dynamic method reasonably aligns with the constant (state dependent) methods but it offers a much broader picture of the risk–return trade-off. We also link its evolution to a set of macroeconomic, systematic and sentiment or uncertainty risk factors. We find that the risk–return relationship is positive during expansionary periods but it decreases during recessionary periods where occasionally even turns out negative. Our main conclusions hold for the consideration of hedging components, different MV-GARCH models or window lengths and several proxies of market returns and risk.

Detecting business cycles for Hungarian leading and coincident indicators with a Markov switching dynamic model to improve sustainability in economic growth

This paper applies the hidden Markov switching dynamic regression (MSDR) model to estimate transition probabilities of the Hungarian GDP between recessionary and expansionary periods. The transition probabilities are then compared to the OECD Hungarian binary business cycle indicator to assess the predictive power of the model. The paper proposes a linear model with a mean and a homoscedastic component. The level of symmetricity between the GDP and business cycles is explained by the panel data variables (Unemployment rate, IPI index, Inflation, BUX year-on-year change, and 10-3 Year sovereign bond yield spreads). It is assumed in this paper that by extending the model to encompass an exogenous variable listed in the panel data, essentially making the model bivariate, the maximum likelihood function would capture the business cycle more accurately. The results show that by plugging the unemployment rate as the exogenous variable in the regression, our model’s accuracy is 70%.

Sufficient statistics for frictional wage dispersion and growth

This paper develops a sufficient statistics approach for estimating the role of search frictions in wage dispersion and life‐cycle wage growth. We show how the wage dynamics of displaced workers are directly informative of both for a large class of search models. Specifically, the correlation between pre‐ and post‐displacement wages is informative of frictional wage dispersion. Furthermore, the fraction of displaced workers who suffer a wage loss is informative of frictional wage growth and job‐to‐job mobility, independent of the job‐offer distribution and other labor‐market parameters. Applying our methodology to US data, we find that search frictions account for less than 20% of wage dispersion. In addition, we estimate that between 40 to 80% of workers experience no frictional wage growth during an employment spell. Our approach allows us to estimate how frictions change over time. We find that frictional wage dispersion has declined substantially since 1980 and that frictional wage growth, while low, is more important toward the end of expansionary periods. We finish by estimating two versions of a random search model to show how at least two different mechanisms—involuntary job transitions or compensating differentials—can reconcile our results with the job‐to‐job mobility seen in the data. Regardless of the mechanism, the estimated models show that frictional wage growth accounts for about 15% of life‐cycle wage growth.

The calming effects of conflict: The impact of partisan conflict on market volatility

In recent decades, an increasing divide in political ideologies between Republicans and Democrats has had a notable impact on financial markets. In this paper, we investigate the effect of political conflict, as measured by the partisan conflict index (PCI), on both market and industry-level volatility. We find that PCI has a significant negative impact on market volatility, robust to different regression models. We provide evidence that such impact is not driven by dramatic political events, namely wars and presidential elections, or by presidential party. When controlling for market cycles, we show that PCI reduces volatility during expansionary periods but increases volatility during recessions. Furthermore, at the industry level, we find that PCI decreases volatility overall. We also find that PCI decreases the volatility of politically-sensitive industries significantly more that it does with other industries. These results can inform government policy makers, analysts, investors, and academics alike.

Nonlinear responses of consumption to wealth, income, and interest rate shocks.

Nonlinear adjustments of consumption to housing prices, stock prices, income, and interest rates were investigated by employing panel data from 25 countries, spanning the period 2000 to 2016. This is the first study which STAR family models and nonlinear impulse response functions based on the local projections employed alternatively. We present three main pieces of evidence: (1) housing prices, stock prices, interest rates, and income exposures of consumption show time-varying and asymmetric behaviours across all countries, (2) housing wealth effects show stronger persistency and are generally larger than financial wealth effects in most of the countries, and (3) time-varying housing and financial wealth effects are high (low) during expansionary (recessionary) periods across all countries. We suggest to consider both monetary and fiscal policies, as well as the asymmetric and time-varying nature of house prices, stock prices, income, and interest rates on the top of any potential impact of the level of transition in these variables.

Tax compliance, public spending and happiness in Europe

PurposeThis study aims to analyze whether tax compliance is the basis for the short-run dynamics of the development of welfare and happiness. The strengthening of tax compliance of corporates and citizens is not only important to achieve the goals assumed by fiscal policy but also is part of the values that can generate a higher level of welfare and happiness in Europe.Design/methodology/approachThis study uses a dynamic factor model to offer new indexes that allow to monitor tax compliance, public spending and happiness trajectories and to evaluate their short-run relationships. Next, an analysis of the cyclical characteristics in terms of duration, amplitude and intensity is provided using the Harding and Pagan method (2002).FindingsThe empirical findings show that the European countries were able to reinforce tax compliance during the expansionary periods of the economy, and this has made it possible to increase public spending, and indirectly, happiness. Otherwise, this paper shows that the contractions of public resources during the global crisis, such as the case in the COVID-19, reduced the possibilities of well-being in Europe and made it more difficult to increase public spending and happiness.Research limitations/implicationsThis study tries to analyze the transmission channels and relationships of three very complex variables: tax compliance, public spending and happiness. Incorporating these three variables into this research, with a short-run perspective, the authors have opened a new line of research that enriched the previous analysis. Therefore, the authors’ results should be considered the first step, that this study is going to continue to unravel the complexity of these relationships.Practical implicationsThe design of policies aimed at improving individual, corporate and the well-being of nations needs them to incorporate elements of tax compliance as an objective that has economic and social implications. Individuals and corporates contribute to a fairer and more equitable society through compliance with tax obligations.Originality/valueTo the best of the authors’ knowledge, this is the first paper that offers evidence on the short-run dynamics of tax revenue, public spending and happiness for a better understanding of their relationships and behavior during the different periods of the economy.

Structural Tax Reforms and Public Spending Efficiency

We empirically assess the effects of structural tax reforms on government spending efficiency in a sample of 18 OECD economies over the period 2006–2017. After calculating input spending efficiency scores, we evaluate in a panel setup the relevance for public sector efficiency of narrative tax changes. We find that: i) input efficiency scores average around 0.6–07; ii) increases in tax rates, primarily for PIT, negatively affect public sector efficiency; iii) controlling for endogeneity, increases in tax rates are still associated with lower public sector efficiency, mainly for PIT and increases in tax bases improve public sector efficiency; vi) in expansionary periods, increasing the CIT base and reducing PIT rates, positively affect public sector efficiency; ix) in contrast, during recessions efficiency improves when PIT and VAT bases increase and the CIT rate increases.

The existence and motivations of irrational loan herding and its impact on bank performance when considering different market periods

This study first investigates whether Taiwanese banks exhibit irrational loan herding after rational herding factors based on industrial growth, profitability and credit rating are controlled in the model of total loan herding. Our results confirm the evidence of irrational loan herding for most types of banks except for government-owned banks (GOBs). Compared with other periods, the irrational herding behavior of small banks during the crisis and expansionary periods is significantly greater, and the irrational herding behavior of GOBs during the presidential election period is significantly greater. We then clarify the motivations behind irrational loan herding, including characteristic herding and investigative herding. Next, we detect the impact of irrational loan herding on bank performance. We find that the irrational loan herding of POBs, independent banks and small banks has more significantly negative impacts on their performance than does the irrational herding of their counterpart banks. Finally, we investigate whether irrational loan herding during specific market periods has a more significantly harmful effect on bank performance. Our results show that there is a greater negative impact of irrational loan herding by privately owned banks than by GOBs on bank performance during the crisis and expansionary periods, while the situation is the opposite during the presidential election period.

The impact of USDA’s business and industry loan guarantee program on tax revenue in Oklahoma communities

ABSTRACT Many public-sector programs are focused on economic development in rural areas, but few are formally evaluated. One often-overlooked component of effective rural development is the generation of local sales tax revenue, which helps fund city amenities and services. This paper evaluates whether the United States Department of Agriculture’s (USDA) Business and Industry (B&I) Loan Guarantee program impacted sales tax revenue for recipient Oklahoma communities. Sales tax revenue and demographic/business data for all Oklahoma communities that charged a sales tax between 2005 and 2015 are meshed with information on B&I loan recipients during that time. Coarsened exact matching (CEM) and multivariate regression techniques are then used to assess impacts on local sales tax revenues. The results demonstrate that the B&I program had a positive impact on total retail sales per capita over the full period, and that the effects were evident in recessionary but not expansionary periods. The evidence suggests that the B&I program can improve the financial health of recipient communities, and that their impacts are likely larger during economic downturns when tax revenue is even more vital for rural communities.

Distortionary effects of economic crises on policy coordination in Turkey: Threshold GMM approach

This study investigates the interaction between fiscal and monetary policies and how crises affect the coordination between policymakers in Turkey. This study’s novelty is that a nonlinear Taylor rule indicating monetary policy response function is estimated based on the Threshold Generalized Method of Moments (Threshold GMM) methodology over the period January 2006—March 2020. The empirical findings reveal that when fiscal policy has an expansionary stage, especially in crises times, the policy interest rate does not react significantly to the inflation gap, output gap and real effective exchange rate gap in expansionary periods. On the contrary the policy interest rate gives statistically important responses to these variables during contractionary fiscal policy periods. Thus, the effectiveness of the Taylor rule appears in a period of contractionary fiscal policy. This situation gives rise to the significant policy implication that the monetary policymaker’s success in controlling inflation increases with the contractionary fiscal policy. Finally, it has been observed that effective coordination between monetary and fiscal policies did not occur during crisis periods, but compatible coordination was achieved in other periods.

Hamilton Versus Hamilton: Spurious Nonlinearities

Using Monte Carlo simulations, this paper evaluates the ability of the trend-cycle decomposition approach of Hamilton (2018) to adequately identify asymmetries in business cycles fluctuations. By considering different specifications of linear and asymmetric processes consistent with previous estimates, the results indicate that the approach of Hamilton (2018) is unable to preserve true asymmetric behavior nor reproduce U.S. business cycles features, especially in highly persistent or mildly asymmetric processes, or in small samples. The findings are robust to the presence of a time-varying drift, the complexity of the autoregressive dynamics and symmetric nonlinearity. Furthermore, the approach of Hamilton (2018) generates spurious expansionary periods when none exist in the data-generating process. Interestingly, they occur, exclusively, in the case of Markov-switching models of the type introduced by Hamilton (1989), but not for other nonlinear models. Meanwhile, the distortions are also present in the case of symmetric nonlinearity. Based on these findings, caution is called into question when the approach is applied to processes that are thought to behave nonlinearly.

The impact of monetary policy stance, financial conditions, and the GFC on investment-cash flow sensitivity

This paper investigates the role of internal finance in determining firms’ fixed capital investments in an emerging economy. Using a comprehensive panel data set from Turkish unlisted small and medium-sized enterprises (SMEs) in the manufacturing sector, we estimate a set of dynamic firm investment models in which the marginal impact of cash flow on investment is allowed to vary with the central bank’s monetary policy stance, financial conditions at the macro level and the Global Financial Crisis (GFC). According to the system-GMM estimation results, the sensitivity of investment to cash flow is positive and statistically significant, implying that firms are constrained by internal finance. Empirical results suggest that the degree of investment-cash flow sensitivity significantly varies with the monetary policy stance. While the investment-cash flow sensitivity declines during periods of expansionary monetary policy for financially constrained firms, the evidence is not conclusive for less-constrained firms that can access external finance relatively easily. We also find that investment-cash flow sensitivity declines when broader macro-financial conditions are relatively supportive. Furthermore, firms’ cash flow needs grow considerably during recessionary periods (e.g., the GFC) compared to expansionary periods due to less availability of external funds.