Large Demand Shocks Research Articles

Migration spillovers within families: Evidence from Thailand

When a person migrates, are their family members more likely to migrate too? I estimate the causal impact of family migrant network size on migration decisions using household survey data from rural Thailand. Large but temporary labor demand shocks in a nearby city—originating from a national infrastructure program—provide plausibly exogenous variation in family members' migration decisions based on their ages at the time of the program. Among those too young to be directly impacted by the program, I find that each older family migrant increases their migration probability by about 5 percentage points. Further analysis suggests a role for better information about the destination in driving this impact. My findings imply that the short-run benefits of relieving migration constraints can underestimate the long-run benefits due to spillovers within the household.

Trade liberalization and women's marriage and fertility decisions in Vietnam

This study investigates the impact of a large demand shock driven by the US-Vietnam Bilateral Trade Agreement (BTA) in 2001 on the timing of women's marital decisions and first childbirth experiences in Vietnam. We hypothesize that the reduction in women's and men's self-employment would delay family formation and childbirth, with the ultimate impact on marriage remaining ambiguous. Analyzing data from the Vietnam Household Living Standards Surveys, we find that both men and women are less likely to be self-employed in the face of a substantial trade shock. Notably, the decreasing impact on women's self-employment becomes more pronounced than that for men post-2012, a decade after the agreement's enforcement. Employing the Multiple Indicator Cluster Survey and survival analysis, we empirically demonstrate that increased exposure to trade postpones women's timing of marriage and first childbirth. On average, in 2013, the BTA resulted in a 7.39- and 7.42 %-point decrease in the probability of entering marriage and becoming a mother, respectively. We also present suggestive evidence that increased exposure to trade liberalization eventually increases the likelihood of marriage and the number of children among women over 40. The findings in this study imply that policy promoting trade liberalization should consider its extensive impacts on young labor force's family formation through change in their individual economic prospects.

Aggregate demand uncertainty outbreaks and employment hysteresis in G7 countries

The slow recovery following the recent financial crisis in many developed countries, and the predictable long lasting economic effects of the Covid-19 pandemic have raised a new interest on the topic of employment hysteresis. In the presence of hysteresis there is no predetermined long-run equilibrium level of aggregate employment. As the economic system is not self-adjusting toward a unique equilibrium, timely, and sustained expansionary macroeconomic policies should be applied to mitigate the impact of negative shocks. The purpose of this paper is to uncover hysteresis effects in the macrodynamics of employment along with variations in its intensity that may result from outbreaks in aggregate demand uncertainty. We estimate a switching employment equation based on the play model of hysteresis, which describes a dynamic process whereby non-convex adjustment costs and uncertainty create intervals of weak reaction of employment to small changes in forcing variables, but spurts in the reaction to large demand shocks. As a novel feature, the estimation allows the presence of structural breaks in the value of the switching parameter of the employment equation due to aggregate demand uncertainty outbreaks. We have concluded that hysteresis effects increased in general in crisis periods associated to outbreaks of uncertainty in aggregate demand.

Hysteresis in the Dynamics of Employment by Activity Sector

ABSTRACT Hysteresis, referring to the property of a system whereby some temporary shocks cause permanent effects, has showed to be important to explain the dynamics of aggregate employment. What is not yet addressed properly in the literature is the differentiation of hysteresis effects according to activity sectors. This subject is important in order to understand whether severe recessions, like the one that followed the COVID-19 pandemic with its recognized heterogeneous immediate effects at the sectoral level, have permanent effects, and prospectively for applying adequate stabilizing fiscal and monetary policies, and possibly other specific measures, to prevent excessive market shocks even if they are perceived to be temporary. For this purpose, we apply the play hysteresis model, which describes a dynamic process whereby non-convex adjustment costs create intervals of weak reaction of employment to forcing variables, and spurts in employment in reaction to large or cumulative small labour demand shocks. The model is implemented by means of a switching employment equation. The switching parameter is interpreted as an ‘employment band of inaction’ that summarizes the magnitude of the hysteretic effects. We have found significant hysteresis effects in the employment dynamics across sectors, and these are especially important for industry.

Modelling and Estimating Large Macroeconomic Shocks During the Pandemic

This paper proposes and estimates a new Two-Sector One-Agent model that features large shocks. The resulting medium-scale New Keynesian model includes the standard real and nominal frictions used in the empirical literature and allows for heterogeneous COVID-19 pandemic exposure across sectors. We solve the model nonlinearly and we propose a new nonlinear, non-Gaussian filter designed to handle large pandemic shocks to make inference feasible after 2020. Monte Carlo experiments show that it correctly identifies the source and time location of shocks with a massively reduced running time, making the estimation of macro-models with disaster shocks feasible. The estimation is carried out using the Sequential Monte Carlo sampler recently proposed by Herbst and Schorfheide (2014).Our empirical results show that the pandemic-induced economic downturn can be reconciled with a combination of large demand and supply shocks. More precisely, starting from the second quarter of 2020, the model detects the occurrence of a large negative demand shock in consuming all kinds of goods, together with a large negative demand shock in consuming contact-intensive products. On the supply side, our proposed method detects a large labor supply shock to the general sector and a large labor productivity shock in the pandemic-sensitive sector.

Supply and demand shocks in the COVID-19 pandemic: an industry and occupation perspective

We provide quantitative predictions of first-order supply and demand shocks for the US economy associated with the COVID-19 pandemic at the level of individual occupations and industries. To analyse the supply shock, we classify industries as essential or non-essential and construct a Remote Labour Index, which measures the ability of different occupations to work from home. Demand shocks are based on a study of the likely effect of a severe influenza epidemic developed by the US Congressional Budget Office. Compared to the pre-COVID period, these shocks would threaten around 20 per cent of the US economy’s GDP, jeopardize 23 per cent of jobs, and reduce total wage income by 16 per cent. At the industry level, sectors such as transport are likely to be output-constrained by demand shocks, while sectors relating to manufacturing, mining, and services are more likely to be constrained by supply shocks. Entertainment, restaurants, and tourism face large supply and demand shocks. At the occupation level, we show that high-wage occupations are relatively immune from adverse supply- and demand-side shocks, while low-wage occupations are much more vulnerable. We should emphasize that our results are only first-order shocks—we expect them to be substantially amplified by feedback effects in the production network.

When the U.S. catches a cold, Canada sneezes: A lower-bound tale told by deep learning

The Canadian economy was not initially hit by the 2007-2009 Great Recession but ended up having a prolonged episode of the effective lower bound (ELB) on nominal interest rates. To investigate the Canadian the ELB experience, we build a “baby” ToTEM model – a scaled-down version of the Terms of Trade Economic Model (ToTEM) of the Bank of Canada. Our model includes 49 nonlinear equations and 21 state variables. To solve such a high-dimensional model, we develop a projection deep learning algorithm – a combination of unsupervised and supervised (deep) machine learning techniques. Our findings are as follows: The Canadian ELB episode was contaminated from abroad via large foreign demand shocks. Prolonged ELB episodes are easy to generate with foreign shocks, unlike with domestic shocks. Nonlinearities associated with the ELB constraint have virtually no impact on the Canadian economy but other nonlinearities do in particular, the degree of uncertainty and specific closing condition used to induce the model’s stationarity.

Private Supply of Safe Assets: Shadow Banks Versus Traditional Banks

We show that the creation of private safe assets by shadow banks can decrease traditional banks' supply of safe assets. The 2014-2016 money fund reform created a large demand shock for safe assets, to which Federal Home Loan Banks (FHLBs) responded, expanding their balance sheets and increasing their issuance of short-term debt. To reduce the resulting interest rate risk, FHLBs shortened the repricing of their loans to banks. Focusing on small banks for which the reform was exogenous, we use a novel instrumental variable strategy to show that shadow banks create safe assets at the expense of banks' deposits.

The shale revolution and shifting crude dynamics

SummaryOil price fluctuates in response to both demand and supply shocks. This paper proposes a new methodology that allows for timely identification of the shifting contribution from the two types of shock through a joint analysis of crude futures options and stock index options. Historical analysis shows that crude oil price movements are dominated by supply shocks from 2004 to 2008, but demand shocks have become much more dominant since then. The large demand shock following the 2008 financial crisis contributes to the start of this dynamics shift, whereas the subsequent shale revolution has fundamentally altered the crude supply behavior.

The Influence of Opec+ on Oil Prices: A Quantitative Assessment

Between January 2017 and March 2020 a coalition of oil producers led by OPEC and Russia (known as OPEC+) cut oil production in an attempt to raise the price of crude oil. In March 2020 the corona virus shock led to a collapse of this coalition, as members did not agree on keeping the oil market tight in the face of a large negative demand shock. Yet, was OPEC+ actually effective in sustaining the price of oil? Between 2017 and early 2020 when the OPEC+ strategy was in place, oil inventories fell substantially and the price of oil reached a peak of around 80 USD per barrel, from a minimum of 30 USD in 2016. This suggests that the OPEC+ strategy had a significant impact on the global oil market. Yet, to what extent did crude prices actually reflect OPEC+ production cuts rather than other factors, like swings in demand for oil? How would the price of oil have evolved had OPEC+ not cut supply? This paper provides an answer to these questions through a counterfactual analysis based on two structural models of the global oil market. We find the impact of OPEC+ on the market was overall quite limited, owing to significant deviations from the assigned quotas. On average, without the OPEC+ cuts, the price of oil would have been 6 percent (4 USD) lower.

Small Price Responses to Large Demand Shocks

Abstract We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population displacement, and shopping sprees around major snowstorms and hurricanes. We find that these large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and despite the fact that stores adjust prices frequently. We also provide evidence that retailers maintain frequent promotional sales even as their demand varies and that they seek to match movements in their local competitors’ recourse to promotional sales.

Supply of Private Safe Assets: Interplay of Shadow and Traditional Banks

We show that the creation of private safe assets by shadow banks can crowd out traditional banks' supply of safe assets. The 2014-2016 money market fund reform created a large demand shock for government- or government-like safe assets. Shadow banks responded, and in particular, Federal Home Loans Banks (FHLBs) increased their issuance of short-term safe debt. While increasing their balance sheet, FHLBs managed their interest rate risk by mainly increasing their supply of highly interest-rate sensitive loans to their members. As banks differ in their interest rate risk-management, not all could take advantage of increased supply of FHLB loans. We use this differential borrowing in response to the money market reform to study the effect of increased supply of safe assets by FHLBs on banks' balance sheets. We find that banks use FHLB borrowing as a perfect substitute for deposit financing. The substitution of safe debt with FHLB borrowing does not go along with an overall increase in the balance sheet and therefore has no lending effect. This finding has important implications for the transmission of monetary policy as well as broader economic activities. If shadow banks create safe assets at the expense of traditional banks' deposits, then there will be a minimal effect on the total funding available for households and firms from banks and shadow banks.

Inflation Targeting: A Monetary Policy Regime Whose Time Has Come and Gone

Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system. Its arrival coincided with a rise in macroeconomic stability for numerous countries, and this led many observers to conclude that it is the best way to do monetary policy. Some studies show, however, that inflation targeting got lucky. It is a monetary regime that has a hard time dealing with large supply shocks, and its arrival occurred during a period when they were small. Since this time, supply shocks have become larger, and inflation targeting has struggled to cope with them. Moreover, the recent crisis suggests it has also has a tough time dealing with large demand shocks, and it may even contribute to financial instability. Inflation targeting, therefore, is not a robust monetary-policy regime, and it needs to be replaced.

Competition in Retail Petrol Markets

We study the relationship between prices and market structure in geographically isolated markets that are exposed to large demand shocks. The temporal variation in market size allows us to overcome the classical endogeneity bias in standard concentration‐performance regressions. We find evidence of local market power in petrol markets due to product differentiation. Additionally, the high margins that characterise concentrated markets dissipate quickly with the number of competitors. Ignoring market structure endogeneity leads to underestimating the effect of market concentration on prices between 55 and 70%.

Shale Revolution and Shifting Crude Dynamics

Crude prices are subject to both demand and supply shocks. Major events and structural changes can induce large variations in intensities of the two types of shocks, as well as their magnitudes of impacts on crude price movements. This paper proposes a theoretical framework that allows us to extract the time variation in demand and supply shocks through a joint analysis of crude futures options and stock index options. Historical analysis shows that crude futures price movements are dominated by supply shocks in the earlier half of our sample from 2004 to 2008, but have become much more demand-driven since then. The large demand shock from the Great Recession, triggered by the 2008 financial crisis, contributes to the start of the dynamics shift. The shale revolution, on the other hand, has fundamentally altered the crude supply behavior. Since 2010, technology advances in horizontal drilling and hydraulic fracturing, together with other innovations, have enabled rapid increase of U.S. tight oil production from shale at increasingly competitive cost. The increasing tight oil production has undercut the price-setting power of the OPEC, and has lowered the OPEC's incentive to self-regulate its production. As a result of the dynamics shift, investors have also been shifting from worrying about crude price hikes as a production cost gauge to crude price drops as an indication of weakening demand. The shifting dynamics have fundamental implications for optimal fuel cost hedging by heavy crude users such as the airline industry.

Great recession, slow recovery and muted fiscal policies in the US

This paper reconsiders the role of macroeconomic shocks and policies in determining the Great Recession and the subsequent recovery in the US. The Great Recession was mainly caused by a large demand shock and by the ZLB on the interest rate policy. In contrast with previous findings, the subsequent jobless recovery is explained by the ZLB effect. We estimate a fraction of Non-Ricardian households which is close to 50%, and obtain comparatively large fiscal multipliers. However we cannot detect a significant contribution of fiscal policies in stabilizing the US economy. For instance, the 2007–2009 large increase in expenditure-to-GDP ratios was apparently determined by the adverse non-policy shocks that caused the recession.

The Danish Flexicurity Labour Market During the Great Recession

Can the Danish flexicurity model cope with a deep recession, or will long-term unemployment increase and the social safety net become overburdened? The Danish economy has experienced a boom-bust pattern ending with a large drop in GDP and thus labour demand. So far, the flexicurity model has coped with the Great Recession in the sense that gross flows in the labour market remain high, most unemployment spells are short, and there are no strong indications of increases in long-term unemployment. There are thus no signs that the large and prolonged aggregate demand shock is causing an increase in structural unemployment. Active labour market policies and fiscal space to accommodate the crisis are important in accounting for the performance of the model.

Effective Monetary Policy Strategies in New Keynesian Models: A Reexamination

We explore the importance of the nature of nominal price and wage adjustment for the design of effective monetary policy strategies, especially at the zero lower bound. Our analysis suggests that sticky-price and sticky-information models fit standard macroeconomic time series comparably well. However, the model with information rigidity responds differently to anticipated shocks and persistent zero-lower bound episodes - to a degree important for monetary policy and for understanding the effects of fundamental disturbances when monetary policy cannot adjust. These differences may be important for understanding other policy issues as well, such as fiscal multipliers. Despite these differences, many aspects of effective policy strategy are common across the two models: In particular, highly inertial interest rate rules that respond to nominal income or the price level perform well, even when hit by adverse supply shocks or large demand shocks that induce the zero-lower bound. Rules that respond to the level or change in the output gap can perform poorly under those conditions.

Abstracts

Abstracts

Editors’ Introduction

Editors’ Introduction