Foreign Shocks Research Articles

International macroeconomic vulnerability

Small open economies are known to be impacted by shocks to larger economies. This phenomenon is known as macroeconomic vulnerability. We propose and implement a novel index of macroeconomic vulnerability to foreign shocks for a given pair of a large economy and a small open economy. It uses a structural time-varying Bayesian VAR with a block-exogeneity hypothesis. The index is based on the sum of the responses of the small open economy to shocks in the large economy over time, thus allowing us to disentangle and measure the source of the shock, the impact variables, and the duration of impact. We highlight two results out of the many that our index unveils. First, we do not find a difference between the international impact of U.S. shocks during periods of crises versus stability. Second, we find that there is a growing decouple between emerging markets (EM) and developed markets (DM) on how their domestic inflation is affected by U.S. output shocks. Our approach can also be used to elucidate previously unknown transmission channels or unmeasured theoretical mechanisms. Finally, using a sample of developed and developing countries, we find that global banks do not increase the macroeconomic vulnerability of a country.

Economic Fundamentals and Real Exchange Rate in African Oil Producing Countries: Evidence from Asymmetric Cointegration

The role of exchange rates is very important in the international market and the variability of exchange rates both in the case of appreciation or depreciation is directly connected with the economic performance of a country. Exchange rate variations in oil-producing countries in Africa have been too high resulting in volatilities due to domestic and foreign shocks. High volatility of exchange rate may translate into reduction of trade flows, foreign direct investment, and instability in both interest rates and inflation rates. Several studies on the relationship between economic fundamentals and exchange rates focused more on Africa or country-specific with limited focus on African oil-producing countries using asymmetric cointegration. Therefore, this study examines the relationship between some economic fundamentals and real exchange rates in oil-producing countries in Africa. The dynamics panel non-linear autoregressive distributed lag and linear autoregressive distributed lag were used to investigate the relationship between economic fundamentals and real exchange rate (RER). The NARDL result shows evidence that there exists both short and long-run asymmetric relationship between economic fundamentals and RER. The study recommended that policymakers in these countries pay more attention to their macroeconomic policies to reduce the production and transaction costs of foreign direct investment (FDI).

Specialization, market access and real income

This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reduced-form elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We show that the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multi-sector production and trade model with input–output linkages and external economies of scale can match the empirical estimates.

Foreign Shocks as Granular Fluctuations

Previous articleNext article No AccessForeign Shocks as Granular FluctuationsJulian di Giovanni, Andrei Levchenko, and Isabelle MejeanJulian di Giovanni Search for more articles by this author , Andrei Levchenko Search for more articles by this author , and Isabelle Mejean Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmailPrint SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Just Accepted Article DOIhttps://doi.org/10.1086/726235 HistoryAccepted May 23, 2023 © 2023 The University of Chicago. All Rights reserved.PDF download Crossref reports no articles citing this article.

From Micro to Macro: The Influence of Firm Heterogeneity on Foreign Shock Transmission

From Micro to Macro: The Influence of Firm Heterogeneity on Foreign Shock Transmission

International input–output linkages and changing business cycle volatility

We quantify the effects of changes in international input–output linkages on the nature of business cycles. We build a multi-country international business cycle model with manufacturing and non-manufacturing sectors that matches the input–output structure within and across countries. We find that, in our 23-country sample, changes in the international input–output linkages between 1970 and 2007 have led to a drop in output volatility in all countries, explaining up to a half of the drop in output volatility in a median country observed in the data. In the model, stronger international linkages tend to stabilize output in response to domestic shocks, and destabilize for foreign shocks. Since foreign shocks still play a modest role in driving domestic business cycles, the stabilization effects dominate. Nevertheless, changing international linkages have generated larger shock transmission across countries, increasing the risk of a global recession.

The macroeconomic effects of exchange rate movements in a commodity-exporting developing economy

This paper empirically examines the macroeconomic effects of exchange rate movements and their transmission mechanisms (trade and financial channels) in Mongolia, a net debtor in foreign currency and a commodity-exporting developing economy, using Structural Bayesian Vector Autoregression (SBVAR) models. Our findings suggest that both the financial and trade channels of exchange rates are operative and have a notable impact at the macroeconomic level. We identify a significant financial channel, causing GDP contractions and affecting investments, particularly in sensitive sectors such as manufacturing and construction in response to DWER depreciation shocks. The traditional trade channel, driven by NEER depreciation, leads to increased net exports with pass-through to CPI. Despite these effects on key macro variables, exchange rate shocks do not substantially destabilize the economy. Foreign shocks, including federal funds rates, China's GDP, and copper prices, have a more pronounced impact. The trade channel plays a crucial role in the transmission of external demand and commodity price shocks, while the financial channel is essential in the transmission of commodity price shocks.

Technology diffusion and international business cycles

This paper shows that the cross-country diffusion of innovations forms a critical channel through which macroeconomic shocks are transmitted across economies. This inference is obtained from a two country, medium scale DSGE model that includes an endogenous growth mechanism. R&D activity and innovation are the main components of this mechanism and they are introduced through a labor-augmenting technology. The model features international diffusion of technologies as the innovations by a firm are not only adopted by other firms within a country but also by those in the other country. Estimating the model with US and Euro Area data, I observe that foreign shocks contribute a high share to the macroeconomic volatility in each economy. By contrast, foreign shocks make a negligible contribution when the model is estimated after shutting down technology diffusion. The results, more generally, show that it is not technology shocks, nor any other shock, but the transmission of shocks through the diffusion of new technologies that is the key driver of international business cycles.

On foreign drivers of emerging markets fluctuations

We quantify the fraction of business cycles fluctuations in emerging markets explained by the combined dynamics of a set of common external drivers. By means of specific constraints on a state-space model fitted to a panel of real, financial and commodity price data for twelve emerging economies, we single out financial, commodity and growth common factors driving jointly a third of GDP fluctuations. Our partition of foreign shocks faced by emerging markets offers new insights into the primitive sources of emerging market cycles and feeds policy discussions in terms of the effects of global financial cycles versus commodity prices. Even when we control for the presence of financial cycles, fluctuations in commodity prices play a predominant role on the performance of emerging markets.

Evaluating the effectiveness of monetary policy for retail central bank digital currency

This paper evaluates the macroeconomic effects of monetary policy for a central bank digital currency rule with traditional monetary policy in an open environment. We build a dynamic stochastic general equilibrium small open model economy with interest-bearing central bank digital currency assets. The redistribution of asset holdings and the change in asset price are the two pathways through which a retail central bank digital currency rule under the traditional monetary policy affects the macroeconomy. Fiat's digital and traditional monetary policies complement one another in lowering macroeconomic fluctuations. As a result, the real exchange rate, current accounts, and consumption are more stable in transmitting foreign shocks. These results occur when price-based or quantitative-based fiat digital monetary policy parallels traditional price-based monetary policy.

몽골의 산업구조와 산업정책 방향

The industrial structure in Mongolia was made up of the agriculture and stock-farming industry at 13.0%, the mining-manufacturing industry at 45.5%, and the service industry at 43.1% respectively in 2021. This is the typical industrial structure that is shown in developing countries.
 The mining industry has been considered the easy and strong major driving sector to economic growth in Mongolia which retains various plentiful resources. And this belief may hinder the transition of the industrial structure of Mongolia to the one of developed countries. To ascertain this belief, we estimate Mongolia's industrial elasticity of economic growth from 1985-2022. The industrial elasticity of economic growth was shown as the stock-farming industry at 2.0%, the mining-manufacturing industry at 12.2%, and the service industry at 11.2% respectively.
 The excessive dependency on the mining industry brought about Dutch disease in Mongolia. And the economy has been too weak to the foreign shocks. The industrial policy in Mongolia should be carefully executed to avoid Dutch disease and Mongolia should develop a manufacturing industry in order to achieve stable, and sustainable economic growth and development for the future.
 Fortunately, the Mongolian government seems to perceive the necessity of persistent manufacturing industry development in the future. The industrial policy alternatives for breaking from the heavy dependency on the mining industry and fostering the manufacturing industry in Mongolia were listed in “vision-2050, Mongolian long-term development policy”.

Commodity exports, financial frictions, and international spillovers

This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel, and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model attributes an important fraction of business cycle fluctuations to foreign shocks in the SOEs.

A COMPARISON OF TIME-VARYING VOLATILITY OF ISLAMIC AND CONVENTIONAL STOCK MARKETS IN INDONESIA

Using daily data from January 2003 to December 2021, this paper examines the impact of structural changes on the volatility of Islamic and conventional stocks in Indonesia. Assuming that there are two regimes (regular and turbulence) due to these structural changes and using the MS-GARCH model, this paper finds that the volatility of Islamic and conventional stocks in Indonesia has a different pattern based on the regime. The volatility of Islamic and conventional stocks tends to increase during turbulence compared to regular periods. However, the negative effect of domestic shocks is more significant on stock volatility than on foreign shocks. In addition, this study also found that the response of Islamic and Conventional stocks looks different. This finding implies differences in characteristics between Islamic and conventional stocks responding to structural shocks.

The role of financial drivers on regional economic resilience: Does information technology level matter?

<p>Economic globalization has intensified economic volatility around the world, and the importance of economic resilience has become increasingly prominent in the face of rising uncertainty due to frequent domestic and foreign shocks. Based on provincial panel data in China from 2008-2019, a comprehensive indicator system is constructed to measure regional economic resilience (RER), and the impact of financial driver (FD) on RER is explored from staged, pathway and non-linear perspectives. The main findings are as follows. (1) Both national and regional levels of FD and RER show an upward trend, and the impact of FD on RER has an “inverted-U” shape: as the capacity of FD increases, its impact on regional economic resilience shifts from promoting to inhibiting. The RER has significant spatial agglomeration characteristic. (2) Interestingly, staged analysis shows FD can significantly promote RER only when it is in the “recovery stage”. (3) The pathway analysis of its effect on regional economic resilience shows the following characteristics: financial scale > financial efficiency > financial deepening. (4) From different regions, there are significant differences in the effect of FD on the promotion of regional economic resilience: central region > western region > eastern region. Finally, the corresponding suggestions were provided.</p>

Lockdown spillovers*

Lockdowns imposed to fight the Covid-19 pandemic have cross-border effects. In this paper, we estimate the empirical magnitude of lockdown spillovers in a set of panel local projections. We use daily indicators of economic activity such as stock returns, effective exchange rates, NO2 emissions, mobility and maritime container trade. Lockdown shocks originating in the most important trading partners have a strong and significant adverse effect on economic activity in the home economy. For stock prices and exports, the spillovers can even be larger than the effect of domestic lockdown shocks. The results are robust with respect to alternative country weights used to construct foreign shocks, i.e. weights based on foreign direct investment or the connectedness through value chains. We find that lockdown spillovers have been particularly strong during the first wave of the pandemic. Countries with a higher export share are particularly exposed to lockdown spillovers.

Bank risk-taking in emerging economies: Empirical evidence and theory

This article empirically studies the impact of foreign shocks on bank risk-taking in emerging economies. We use a country panel model for the 2001–2017 period. Using several measures of bank risk-taking, financial openness and foreign debt participation, we find if anything that the lower the financial openness in an economy, the higher the likelihood that the foreign monetary policy rate increases bank risk-taking and that the foreign debt participation reduces bank risk-taking. To provide an intuition of these results, we develop a simple small open economy model with banks facing foreign borrowing limits and taking excessive risk. The novel result is that, when the foreign borrowing limit binds, a lower foreign interest rate reduces excessive bank risk-taking. Since the foreign borrowing limit binds, the lower foreign rate does not boost bank credit but reduces bank default probability, which diminishes bank incentives to take excessive risk. Similarly, greater access to the international credit markets reduces excessive bank risk-taking.

Shock to the System: Coups, Elections, and War on the Road to Democratization by Michael K. Miller

As the fate of democracy hangs in the balance, Michael K. Miller’s book offers a new framework for understanding how democratization occurs. The main takeaway is simple yet compelling: of the 139 democratic transitions that took place from 1800 to 2014, 127 (that is, a whopping 91 percent) follow one of two paths: shocks or electoral continuity. The numbers speak for themselves. But what are “shocks” and “electoral continuity”? How do they differ from the paths highlighted by previous scholarship on democratization? And what is left out? According to Miller, shocks are significant violent events including domestic elite conflicts (coups, civil wars, and assassinations) and foreign shocks (defeat in war and withdrawal of a hegemon). Electoral continuity, instead, occurs when an established ruling party democratizes because party leaders expect to remain competitive in the new democracy (6). If we read the book as a theory of democratization, Miller’s story is neither economical nor particularly elegant. Shocks are five separate drivers, and electoral continuity is something else entirely. Yet, as the author himself at times acknowledges, we should perhaps evaluate the contribution less as a theory and more as a framework for better understanding and assessing the causes and consequences of known pathways to democracy. If we do so, we immediately dispel two potentially powerful critiques: First, that the relevance of each path has been established before (in the extensive literature on the topic, cited throughout the book). And second, that the paths are so broad that nothing is left out, circumscribing their explanatory power.

Sectoral supply and demand shocks during COVID-19: Evidence from Mexico

The COVID-19 pandemic has undeniably caused both supply and demand shocks. Nevertheless, it is uncertain to what extent each factor contributed more to the evolution of prices and economic activity at different points since the onset of the pandemic. Whether inflationary pressures are mainly due to demand or supply shocks is an important matter for the stance of monetary policy. By employing a sign-restricted SBVAR, we study supply and demand factors as potential sources of heterogeneity in sectoral performance of economic activity in Mexico. We find that during the peak contraction in 2020-2Q, the demand shock was the dominant source of fluctuation across most sectors. Moreover, we assess the extent to which economic activity responds to foreign shocks and find that domestic demand shocks are the primary drivers of GDP fluctuations in 2020-2Q, with external demand and supply conditions and exchange rate shocks also playing significant roles. In contrast, since the beginning of 2021, external supply has negatively contributed to the variation of several sectors, particularly in industrial production, whereas domestic and external demand factors have generally positively contributed.

Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk

We study how foreign financial developments influence the conditional distribution of domestic GDP growth. We propose a method to account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks within quantile regressions. For an advanced-economy panel, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left-tail of domestic GDP growth, even controlling for domestic indicators. Incorporating foreign variables improves estimates of domestic GDP-at-Risk, both in and out of sample. Decomposing GDP-at-Risk into domestic and foreign origins, we show that foreign shocks are a key driver of domestic macroeconomic tail risks.

International Yield Spillovers

AbstractThis article investigates spillovers from foreign economies to the U.S. through changes in long-term Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes, a proxy for foreign shocks’ contribution to U.S. yields. A model that identifies U.S., Euro area, and U.K. shocks that move global yields suggests that foreign shocks account for at least 20% of the daily variation in long-term U.S. yields in recent years. We also document the predictability of long-term U.S. yields by the U.S.–foreign yield spread.