External Price Shocks Research Articles

Conflict fuels inflation but the tinder lies elsewhere: Eclectic structuralist thoughts in a developing economy context

AbstractDeveloping country inflation is in the headlines again. Mainstream macroeconomics typically ignores the role of conflict while non‐mainstream work tends to ignore macroeconomic constraints. This paper revisits the issue employing a dependent economy framework with eclectic characteristics. Specifically, I explore the mechanisms that propagate both real and monetary sources of inflation in the presence of real wage resistance and distributional conflict. The analysis shows that the inability to pay for subsidies with taxes or bond issuance in a stylized developing economy could create a situation where a relatively small shock leads to sustained and accelerating inflation and a wage‐price spiral, thanks to conflicting claims on income. Subsidies to protect consumers from external price shocks could, similarly, leave a country vulnerable to accelerating wage‐price spirals as the stabilizing relative price effects of a declining foreign asset position are dampened. Distributional conflict thus plays the role of sustainer rather than the primum mobile. Price controls could, in theory, better enable inflation management if these do not result in redistribution toward spenders. Such controls, however, create other trade‐offs for countries facing balance‐of‐payments fragility.

State responses to oil crisis in oil-dependent developing countries: South Korea and Turkey after the 1973 oil crisis

AbstractWhy do oil-dependent developing countries exhibit divergent responses to oil crises? This study employs a comparative case study approach and utilizes a ‘most similar system design’ to examine the varying state responses to the 1973 oil shock in Turkey and South Korea. While the former refrained from implementing radical short-term adjustment policies and reforms, the latter adopted proactive measures to mitigate the worsening impact of escalating oil prices. This research contends that the existing literature, which emphasizes distinctions in industrialization strategies and fiscal policies among developing nations, offers an incomplete explanation for the divergent reactions of states to external price shocks. Instead, the study proposes a sociological perspective, focusing on the influence of varying degrees of state autonomy and the characteristics of bureaucratic systems on the decision-making processes of states. The key finding suggests that while pre-crisis economic policies and industrialization strategies may limit the array of policy tools available to counteract the adverse effects of an oil crisis, the extent of state autonomy and the organization of the bureaucracy – whether adhering to Weberian or non-Weberian principles – impact the efficacy of these policy tools and the determination of decision-makers to act in the best interests of the long-term public good.

The economic consequences of price support policies in semi-subsistence economies

Semi-subsistence households in developing countries play a considerable role as both producers and consumers of agricultural products, with a substantial part of their consumption contributed by home production for home consumption (HPHC). This study employs a modeling framework that integrates an HPHC augmented database with a modified economywide model that accommodates the distinct features of these households. Results from model simulations with border price shocks and several policy responses indicate that farm households are less influenced by external price shocks but are more responsive to enhancements in the local marketing system. Subsidies to strategic non-food imports during soaring prices appear less effective in inducing agents to engage in production. This finding suggests that the welfare gains reported by studies on price incentives locally, and agricultural policy reforms in developed market economies are likely to be large overestimates of the welfare implications for semi-subsistence households in many of the least developed economies.

Sectoral dynamics of industrial policy in a two-sector economy: the case of Korea’s heavy and chemical industry (HCI) promotion (1973–1979)

This study explores the impact of state’s industrial policy on sectoral capacity utilization and growth in total output in the context of the Korea’s Heavy and Chemical Industry (HCI) promotion (1973–1979). Using a Kalecki-Steindl framework within a two-sector open economy, the study first finds that primary industrial policy instruments—preferential interest rates and export promotion regime—have a positive effect on capacity utilization (aggregate demand) and economic growth, but unbalanced sectoral dependence undermines the effect of industrial policy. Second, the increased market power of firms in the targeted sector has a dual impact on the sectoral capacity, depending on the productivity growth characteristics of each sector. Third, the industrial policy regime is highly susceptible to adverse external price shocks. These findings are consistent with the Korean growth experience during the HCI promotion period in which chaebols (big business groups) flourished, and the economy suffered from stagflation and idle capacity in the final stage of HCI promotion.

The Impact of Oil Prices on State Budget Income and Expenses: Case of Azerbaijan

Since Azerbaijan is one of the oil exporting countries, its macroeconomic indicators, especially the exchange rate, the state budget are highly dependent on the oil factor. This study assessed the role of oil in the economy and the impact of the oil factor on the revenues and expenditures of the state budget of Azerbaijan in manat and dollar terms. The study covers the period 2005m03 − 2022m05. Unit root (Augmented Dickey−Fuller (ADF), Phillips−Perron (PP) and Kwiatkowski−Phillips−Schmidt−Shin (KPSS)) tests were applied to check the stationarity of variables (time series). ARDL was applied as a research method. In terms of the reliability of the obtained results, the error correction model (ECM) was used, standard tests were carried out, and the joint integration methods of FMOLS, DOLS and CCR were also applied in the evaluation. Engel−Granger and Phillips−Ouliaris tests have been used to test for cointegration interactions between variables. Short−term, long−term, and strong associations between variables were also calculated. The results of the study showed that the state budget depends on the oil and gas sector, and fluctuations in world oil prices functionally and along the chain affect oil revenues and the state budget. A different impact of oil prices (oil revenues) on the state budget in terms of manat and dollar was the devaluation of the manat, which was carried out to reduce the impact of the global financial and economic crisis on Azerbaijan. The general conclusion of the study was a recommendation to further accelerate work on the diversification of the economy and the development of the non−oil sector. The results of the conducted research can serve as a scientific basis for the economic policy of the state aimed at reducing the impact of external oil price shocks on the economy of Azerbaijan and other similar oil−exporting countries, including on the state budget, and diversifying the economy. The functional dependencies of the income and expenses of the state budget in terms of manat and dollar on world oil prices are given below.

Revisiting the determinants of house prices in China’s megacities: Cross‐sectional heterogeneity, interdependencies and spillovers

We revisit the determinants of house prices in China’s megacities. Previous work on similar topics fails to account for the widespread cross-sectional heterogeneity and interdependencies, despite the importance of them. Using a PVAR estimated by the Bayesian method allowing for these features, we find each city is rather unique, especially on the extent to which local house prices are disturbed by external house price shocks. The spillovers may be partly related to the demand side before 2010, but seems more related to supply factors thereafter, due to the imposition of property purchase restrictions. The new evidence we establish therefore suggests that city-level stabilisation of house prices should fully respect local features, including how local markets respond to external disturbances.

Investigation on the Effects of External Shocks on Bangladesh's Economy: An Application of the Gvar Modelling Approach

This paper uses the global vector autoregressive (GVAR) modelling approach to study (1) the effects of negative output shocks on Bangladesh's following trading partners on Bangladesh's economy: the United States, China, Eurozone, India and Saudi Arabia (2) positive global oil price shocks. To represent Bangladesh's macroeconomics, the GVAR model contains four key macroeconomic variables as endogenous variables. They are (1) real gross domestic product (GDP), (2) real exchange rate, (3) short-term interest rates, and (4) inflation. The specified GVAR model is estimated using quarterly data from 32 countries/regions from 1993Q4 to 2016Q4. The findings of this paper are consistent with theoretical predictions that external shocks can and will be transmitted to an open economy operating under a fixed or managed floating exchange rate system. For example, quantitatively, if the real output of Bangladesh's trading partners' falls by 1%, its output will fall by 0.39%, while the inflation rate of Bangladesh's trading partners' rises by 1%, and Bangladesh's inflation rate will increase by 1.38%. Although the negative output shock of the US economy will not significantly affect the Bangladeshi economy, the negative output shock of the Chinese economy will have a negative and significant effect on the Bangladeshi economy. The negative output shock on the US economy has caused the real exchange rate of Bangladesh's currency to appreciate and raised its short-term interest rate, although it is not statistically significant. Contrarily, a negative output shock to China or other economies devalues the real exchange rate of the Bangladeshi currency, although it is not statistically significant. However, Bangladesh's interest rates have not responded to negative output shocks from its trading partners (except the United States and Saudi Arabia), and they are not statistically significant. One policy implication of Bangladesh's inflation being overly sensitive to external inflation shocks is that Bangladesh can and should make its currency exchange rate more flexible to protect its economy from external price shocks. Unexpectedly, the external oil price shock did not seem to have a significant impact on the Bangladeshi economy. One explanation is that the impact of foreign inflation on Bangladesh's economy may have reflected the impact of oil prices.

Oil Price Shocks and Macroeconomic Outcomes; Fresh Evidences from a scenario-based NK-DSGE analysis for oil-exporting countries

Macroeconomic performances are extremely affected by unexpected oil price shocks in oil-exporting countries. Monetary rules rarely work properly in this environment. Therefore, determining the appropriate rules to reduce macroeconomic volatilities is essential. This study mainly aims to evaluate the oil price shock on macroeconomic variables through the lens of the new Keynesian dynamic stochastic general equilibrium (NK-DSGE) model for oil-exporting economies. The proposed model contains various components including households, firms, the central bank, government, external, and oil sectors as well as some real and nominal frictions and calibrates for an oil-exporting economy, Iran. We have designed an account called a consolidated account by aggregating the government budget, the balance of payments account, and entering the foreign currency. Three novel scenarios have also been developed by combining various rules including exchange rate regimes, inflation targeting, and the oil export revenues in our study. The findings imply that oil price shocks coupled with the rise in oil revenues result in a broadening of the monetary base, and eventually leads to liquidity growth and higher inflation rates. Moreover, such an oil price shock leads to a depreciation in the real exchange rate and a decline in economic competitiveness in all scenarios. Therefore, monetary rules-regardless of the exchange rate regime would lead to a lack of competitiveness with varying degrees of intensity. Our findings suggest that the sovereign wealth funds (SWFs) could be utilized to cushion the economy from external oil price shocks in oil-exporting countries.

FRM Financial Risk Meter for Emerging Markets

The fast-growing Emerging Market (EM) economies and their improved transparency and liquidity have attracted international investors. However, the external price shocks can result in a higher level of volatility as well as domestic policy instability. Therefore, an efficient risk measure and hedging strategies are needed to help investors protect their investments against this risk. In this paper, a daily systemic risk measure, called FRM (Financial Risk Meter) is proposed. The FRM@ EM is applied to capture systemic risk behavior embedded in the returns of the 25 largest EMs’ FIs, covering the BRIMST (Brazil, Russia, India, Mexico, South Africa, and Turkey), and thereby reflects the financial linkages between these economies. Concerning the Macro factors, in addition to the Adrian & Brunnermeier (2016) Macro, we include the EM sovereign yield spread over respective US Treasuries and the above-mentioned countries’ currencies. The results indicated that the FRM of EMs’ FIs reached its maximum during the US financial crisis following by COVID -9 crisis and the Macro factors explain the BRIMST’ FIs with various degrees of sensibility. We then study the relationship between those factors and the tail event network behavior to build our policy recommendations to help the investors to choose the suitable market for investment and tail-event optimized portfolios. For that purpose, an overlapping region between portfolio optimization strategies and FRM network centrality is developed. We propose a robust and well-diversified tail-event and cluster risk-sensitive portfolio allocation model and compare it to more classical approaches.

Global Food Commodity Prices and Domestic Food Inflation: Some Insights from Morocco

This paper examines the world commodity prices pass-through to food inflation in Morocco, over the period 2004-2018, by using Structural Vector Autoregression (SVAR) model on monthly data. Several interesting results are found from this study. First, the impact of global food prices on domestic food inflation is shown significant, which reflects the large imported component in the domestic food consumption basket. Second, the transmission effect is found to vary across commodities. Consumer prices of cereals and oils significantly and positively respond to external price shocks, while those of dairy and beverages are weakly influenced. Third, there is evidence of asymmetries in the pass-through from world to domestic food prices, where external positive shocks generate a stronger local prices response than negative ones. This situation is indicative of policy and market distortions, namely the subsidies, price controls, and weak competitive market structures. Our findings suggest that food price movements should require much attention in monetary policymaking, especially that the country has taken preliminary steps towards the adoption of floating exchange rate regime.

Effect of Oil Prices on Exchange Rate Movements in Korea and Japan Using Markov Regime-Switching Models

We examined the effects of oil prices along with fundamental economic variables on exchange rate movements in the Korean and Japanese foreign exchange markets, using two-regime Markov Regime Switching Models (MRSMs) over the period from January 1991 to March 2019. We selected the best MRSMs explaining their exchange rate movements using the Maximum Log-Likelihood and Akaike Information Criteria, and analyze effects of oil prices on their exchange rates based on the selected best MRSMs. We consider two regimes, regime 1 with high-volatility and regime 2 with low-volatility. In Korea, two apparent regimes are observed, and unstable regime 1 consists of two distinct prolonged periods, the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. Meanwhile in Japan, no evident prolonged regimes are observed. Rather, the two regimes occasionally alternate. Oil prices influence exchange rate movements in regime 2 with low-volatility in Korea, while they do not influence exchange rate movements in either regimes in Japan. The Japanese foreign exchange market is more resistant to external oil price shocks because the Japanese industry and economy has less dependence on oil than Korea.

Food price spikes: Is a cereal export ban the right response for Ethiopia?

Following the price hikes of 2007–2008 and 2010–2011, many governments in low-income countries implemented food export bans. While several studies investigate the macroeconomic impacts of such bans on large net exporters of grains, only very few country case studies have examined the economy-wide and distributional effects combined. Further, there is a lack of rigorous studies that explicitly analyse cereal export bans as policy responses to external price shocks and their net combined effects, both in the immediate and in the short run. This article evaluates this situation for the case of Ethiopia, a net food-importing country. We find that international price shocks not only do affect domestic prices but could also considerably suppress domestic food production and supplies. A cereal export ban can help stabilize domestic food prices but cannot fully erase the price hike. We, however, note that the ban further discourages domestic cereal production and reduces rural households’ welfare.

Macroeconomic Impact of Agricultural Commodity Price Volatility in Nigeria

Introduction: The Nigerian economy has remained consistently heavily dependent on earnings from commodity exports which constitute over 95% external earning and 85% of budgetary and fiscal financing. Agricultural commodity exports have witnessed a significant price swings in the international market in the past few decades resulting in food price hike and macroeconomic distortions in economies heavily dependent on food imports. Methods and Materials: The study assesses the macreoconomic impact of agricultural commodity price volatility in Nigeria from 1970-2017 using Autoregressive Distributive Lag (ARDL) cointegration and Impulse-Response Function (IRF) analysis. The study adopted an atheoretical statistics to ascertain the evidence of swings in macroeconomic aggregates. Results: There was evidence of persistent fluctuations in the macroeconomic variables observed, implying that external price shocks exert a significant impact on the macroeconomic management, since bulk of national budgetary and fiscal financing is from commodity exports. Conclusion: The study found that volatile agricultural prices were responsible for a meager 2% of macroeconomic fluctuations. The empirical evidence corroborates the statistics showing that the share of agriculture in primary commodity exports has consistently remained less than 3% since the advent of crude oil. Furthermore, the study found that the swings in agricultural prices impacts foreign reserves and inflation more significantly and earlier in the time horizons than other macroeconomic aggregates.

The Effect Of External Oil Price Shocks On The Algerian Economy In The Light Of Trade Openness:, Simulation Using The Computable General Equilibrium Model

The Effect Of External Oil Price Shocks On The Algerian Economy In The Light Of Trade Openness:, Simulation Using The Computable General Equilibrium Model

An Analysis of Public Debt Servicing in Zambia: Trends, Reforms and Challenges

Abstract The main goal of this paper is to discuss the dynamics of public debt servicing – both domestic and foreign – in Zambia, tracing the trends, reforms and challenges over the period from 1964 to 2015. The paper shows that the exceptional rise in public debt servicing obligations in Zambia over the period under review has been principally due to high domestic and foreign interest rates, frequent debt rescheduling at commercial rates, and capitalisation of non-liquidated service obligations at commercial rates. Also revealed in the paper is the fact that prior to 2005, Zambia experienced severe public debt servicing problems which eased after 2006 owing to debt relief initiatives and an economic rebound. Among the government debt service reforms discussed in the paper are structural adjustments in foreign exchange management, fiscal and monetary reforms, and aggressive engagement of traditional creditors. Primary among the identified challenges of public debt servicing in Zambia was the insistent economic crises that dogged the country during the study period. Notwithstanding the current public debt service sustainability and remarkable economic performance that characterise the country today, the paper found that the recent contraction of nonconcessional loans by the state poses a threat to debt service sustainability in future. Hence, the paper recommends, among other things, for aligning of public sector infrastructure spending with revenues to ensure budget sustainability, and to continue diversifying the economy to minimise the impact of external commodity price shocks on the economy.

Региональная динамика доходов и потребительского спроса населения в России

The analysis of regional income and consumer expenses dynamics is very important to estimate the stability of the economy. The 2015–2018 analysis shows that the economy of the country and households had adapted to the external price shock of 2015, which is confirmed by the following trends. After a decrease in real income and demand for goods (especially non-food ones) in 2015–2016, the situation changed in the beginning of 2018: the demand in most regions increased, although its growth is weaker than the growth of real wages and nominal household income. Most regions by types and federal districts show similar increase, which supports economy’s stability. In 2015–2017 the growth of nominal population income was seen in all types of regions except export-oriented ones (–0.1% in 2017). The highest growth rates were seen in less developed agricultural (+3.0%), medium-developed agricultural and industrial regions (+3.0%) and developed industrial-agricultural (+2.5%). In 2013–2017, about two thirds of the consumer potential were provided by highly developed and developed regions. The three regions with most potential by type were financial and economic centers (27–28% of the total consumer potential in Russia), agricultural-industrial regions (18–20%) and diversified regions (15–16%). The real retail trade turnover in 2017 increased in all types of regions. Real retail sales decreased only in 17 regions. In 2017–2018, the share of food goods in retail trade started decreasing slowly, which indicates gradual restoration of pre-crisis demand structure

The Impact of World Food Price Fluctuation towards Indonesian Macroeconomics

<p class="Normal1"><span class="normalchar"><em>Stability of price is a crucial factor for export and import activities, especially food commodities.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>Indonesia with the characteristics of a small open economy are vulnerable to external price shock as the implication of economic globalization.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>Understanding the food price shock useful for designing risk mitigation to minimize the effects of shocks to macroeconomic variables.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>The purpose of this research is to analyze the impact of macroeconomics from </em></span><span class="normalchar"><em><span lang="EN-US">V</span>ector </em></span><span class="normalchar"><em><span lang="EN-US">A</span>uto</em></span><span class="normalchar"><em><span lang="EN-US">-R</span>egression (VAR) methods.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>The sensitivity of impulse response estimation and variance decomposition which outlines how large and how the effect of the food price shock.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>Impulse response analysis shows shocks on global food price got the response by fastest and the most powerful by inflation.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>While the description of variance decomposition, variation described by economic growth.</em></span><span class="apple-converted-space"><span> </span></span><span class="normalchar"><em>The results show that the global food price affects economic growth that is transmitted through inflation.</em></span></p>

Pass-through of imported input prices to domestic producer prices: evidence from sector-level data

AbstractMotivated by stylized facts pointing to a dominant role of imported inputs in transmitting external price shocks to domestic prices, this paper zooms in to study the pass-through of imported input costs to domestic producer prices. Our approach constructs effective input price indices from sector-level price data combined with sector-level information on input-output linkages. Applying an error correction model specification to sector-level output and input prices, the long-run pass-through rate of effective imported input costs to domestic producer prices is estimated to be around 70 percent in Korea and almost 100 percent in selected European countries.

Inter-fuel substitution possibilities in South Africa: A translog production function approach

This study applies the translog production function to investigate technical change and energy substitution possibilities among petroleum, coal and electricity over the period 1980–2012. Ridge regression technique is introduced to correct for multicollinearity in the data. The study documents several findings: first, electricity and coal are found to be the major drivers of South African output and also have a faster technological progress over petroleum. Second, all energy inputs were found to be substitutes; therefore removing all price ceilings and subsidies on petroleum will decrease the demand for petroleum in effect protecting South African economy from external petroleum price shocks while reducing CO2 emissions. This will also increase the demand for electricity from renewable sources; however the success of this substitution will depend on policies geared towards large scale electricity production to meet demand. Third and finally, this study points to evidence that, even though coal dominates as the main energy source of South Africa, enhancement in research and development of renewable energy technologies could present opportunities for electricity as a potential replacer of coal; and as such, accelerating the CO2 mitigation effort of the South African government.

Can a Cereal Export Ban Affect a Net Food-Importing Economy? The Case of Ethiopia

Most governments implemented policies designed to offset the expected negative effects of high food prices of 2007/08 and 2010/11. Among other interventions, net food-importing countries, such as Ethiopia, have introduced a cereal export ban. Several studies have investigated the macroeconomic impacts of export bans on large net exporters of grains. However, only very few country case studies have examined the economy-wide and distributional effects combined. Further, there is a lack of rigorous studies that disentangle the net impact of a cereal export ban when an economy is jointly affected by an external price shock. This paper evaluates the impacts of a border price shock followed by a cereal export ban, and cereal export ban alone in a typical net food-importing country, Ethiopia. Results show that border price shocks can have negative production and supply effects on food, causing strong welfare losses on urban households. However, an export ban can stabilise domestic food prices in the short-run, but cannot erase the price hike. Moreover, the ban discourages cereal production, and reduces rural households’ welfare. As expected, a cereal export ban alone can push domestic food prices down and lead to welfare loss for rural households and the society as a whole while urban households benefit.