Local Projection Approach Research Articles

Beyond Competitiveness: Is Productivity Everything?

ABSTRACTThis study examines and compares the predictive power of competitiveness, approximated by the Global Competitiveness Index (GCI), and productivity for economic growth. Using a panel dataset of 62 countries over the period 2007–2019 and the local projections (LP) approach, we find that both higher productivity and higher GCI contribute to higher economic growth over the next 5 years. However, productivity has a stronger predictive power for economic growth than the GCI. We find evidence that this divergence between productivity and GCI could be explained by ‘productivity beyond competitiveness’: As economies develop and converge towards the world technological frontier, the GCI, unlike productivity, no longer captures the key determinants of economic growth. We then examine the determinants of ‘productivity beyond competitiveness’ that can help economies increase their productivity, and by extension growth, even as they approach the technological frontier. We find that higher financial development, institutional quality, as well as some cultural traits explain the divergence between productivity and competitiveness in advanced economies.

Innovation and Demand as Drivers of Labour Productivity: An Integrated Analysis for OECD Countries

ABSTRACT The article seeks to empirically reconcile two strands of research on the determinants of labour productivity growth: on one hand, the Kaldorian literature emphasises the role of autonomous demand; on the other hand, the Schumpeterian literature underscores the role of innovative investments. Specifically, we test two hypotheses. Firstly, we investigate whether demand shocks, private research intensity, and public R&D expenditure influence labour productivity when these variables are considered simultaneously. Secondly, we examine whether private research intensity is affected by demand shocks and public investments in innovation. We make use of a panel of 12 OECD countries spanning the period from 1986 to 2017. We combine the Local Projection approach with structural shocks estimated through Structural Vector Autoregressive modelling. Findings show a positive impact of government R&D investment, demand shocks, and private research intensity on labour productivity. Additionally, when examining the effects of demand shocks and innovative activities by the public sector on research intensity, the results affirm a positive impact of these variables, thus supporting the presence of the Schmooklerian demand-pull hypothesis. These results remain robust across various model specifications and different measures of labour productivity.

Sustainable energy consumption and finance in the presence of risks: Towards a green economy

Moving towards a green economy, sustainable energy consumption and financial development amid mounting risks moved to center stage of policymaking and academia. Strengthening energy consumption from renewable sources is integral to the attainment of the overarching sustainable development goals of the Paris Agreement. The study employs data from 19 OECD economies spanning from 1990 to 2020 to explore the effect of risks on sustainable energy consumption. Using a multifaceted empirical approach -- comprising Panel OLS, MG estimators, quantile regression analysis and local projection approach -- results establish a key role for political, economic and financial risks in determining energy consumption from renewable sources. Results for the impact of finance indicators on sustainable energy consumption provide robust, though mixed, findings on how to bridge the climate financing gap. Our findings underscore the significant positive influence of human capital development, economic growth, economic openness and oil prices on sustainable energy use. It is further shown that decreasing carbon emissions and making sustainable energy more affordable should be on the central agenda of policymaking for promoting environmental sustainability. A multi-lever strategy is needed when making environmental policies while distributional heterogeneity should also be considered.

Effects of oil shocks on markets in G7 countries

This paper aims to assess the effects of oil price shocks on the stock markets of the G7 countries. We develop an oil sentiment indicator that measures the volatility of oil prices. We analyze oil shocks on the stock market of the G7 countries, using a structural VAR and Local Projection approach. Our results suggest that oil shocks explain 8% of the US stock market, 10% in Germany, and 7% in the UK. These results point out the possibility of using this sentiment variable for forecasting the stock market’s volatility.

Fiscal policy and public debt: Government investment is most effective to promote sustainability

This paper aims to quantify the effects of government expenditure and its components, i.e. government consumption and investment, on output and public debt sustainability. The Local Projections approach is applied to a dataset of 14 OECD countries considered for the 1981–2017 period. Fiscal policy shocks have been identified using the Blanchard and Perotti strategy and the narrative approach based on fiscal consolidation episodes. Multipliers of total government spending are above the unit and government investment multipliers are higher than consumption ones. Although all fiscal policy shocks reduce the public debt-to-GDP ratio, government investment is the most effective tool for promoting public debt sustainability.

Unpacking The Contributing And Mitigating Factors of External Debt In Pakistan: An Ardl And Local Projection Approach

Unpacking The Contributing And Mitigating Factors of External Debt In Pakistan: An Ardl And Local Projection Approach

Government spending, multipliers, and public debt sustainability: an empirical assessment for OECD countries

This paper aims to quantify the linear and non-linear effects of government expenditure on output and public debt sustainability using the Local Projections (LP) approach on a dataset of 14 OECD countries considered for the 1981–2017 period. By employing the Blanchard and Perotti strategy to identify fiscal policy shocks, we show that government spending multipliers are close to one in linear models and that expansionary fiscal policy stimuli reduce the public debt-to-GDP ratio. When considering non-linearities using the smooth transition LP model, findings show that a fiscal policy shock leads to higher multipliers and a stronger reduction in the public debt-to-GDP ratio in economic phases characterised by a high rather than a low debt-to-GDP ratio. All results are confirmed even when government spending expectations are considered.

From bottlenecks to inflation: Impact of global supply-chain disruptions on inflation in select Asian economies

Supply-chain bottlenecks emerged alongside unprecedented inflationary surges amid the resulting mismatches in supply and demand for goods and services throughout the COVID-19 pandemic. This study employs a local projection approach to investigate the inflationary impact of global supply-chain pressures in the Philippines and select East Asian neighbors. We find that supply-chain disruptions are followed by sizable and statistically significant increases in headline inflation in the Philippines, Rep. of Korea, Thailand, and Singapore. Supply-chain shocks also have a considerable impact on the tradable segment of core inflation. Meanwhile, non-tradable inflation has a generally smaller, short-lived, and insignificant response to global supply-chain pressures reflecting the limited presence of second-round, indirect effects.

Discount rates and cash flows: A local projection approach

We develop flexible local projections to quantify the relative contributions of expected discount rates and cash flows to the variation of dividend yields. Local projections enable the incorporation of large information sets, the use of monthly data along with annual data, and the consideration of time variation in the dividend yield decomposition. By expanding the set of state variables and allowing for time-varying parameters, our results show that the variation of expected discount rates remains the primary contributor to market volatility, whereas the contribution of expected cash flows is considerably smaller.

Structural reforms and income distribution: new evidence for OECD countries

Abstract This article examines the impact of labour market and product market reforms on income inequality for 25 OECD countries between 1970 and 2020, using the local projections approach and an updated narrative-based dataset of the reform indicators. Our results suggest that both types of (endogenized) market-oriented reforms increase income inequality, but the effects are small. Consistent with this finding is that counter-reforms lead to less income inequality. Our results also indicate that the inequality-increasing effect of market-oriented reforms is mostly a result of more income going to the top of the income distribution.

Federal Reserve Monetary Policy and Wealth Inequality: An Instrumental-Variable Local Projections Approach

Federal Reserve Monetary Policy and Wealth Inequality: An Instrumental-Variable Local Projections Approach

A Local Projections Approach to Difference-in-Differences Event Studies

Many of the challenges in the estimation of dynamic heterogeneous treatment effects can be resolved with local projection (LP) estimators of the sort used in applied macroeconometrics. This approach provides a convenient alternative to the more complicated solutions proposed in the recent literature on Difference in-Differences (DiD). The key is to combine LPs with a flexible ‘clean control’ condition to define appropriate sets of treated and control units. Our proposed LP-DiD estimator is clear, simple, easy and fast to compute, and it is transparent and flexible in its handling of treated and control units. Moreover, it is quite general, including in its ability to control for pre-treatment values of the outcome and of other time-varying covariates. The LP-DiD estimator does not suffer from the negative weighting problem, and indeed can be implemented with any weighting scheme the investigator desires. Simulations demonstrate the good performance of the LP-DiD estimator in common settings. Two recent empirical applications illustrate how LP-DiD addresses the bias of conventional fixed effects estimators, leading to potentially different results.

Financial Stress and Effect on Real Economy: Turkish Experience

The core of this paper is an econometric estimation of the relation between financial stress and a number of macroeconomic variables (consumption, real GDP, investment, unemployment). This estimation is done on Turkish quarterly data for the period 2002-2021 using threshold vector autoregression (i.e., TVAR). The paper observes the non-linear trade-off between financial stress and macroeconomic indicators. The effect of financial stress appears to be adverse when the stress level is already at a higher level. During high stress episodes, any further increase in financial stress drags economic growth down and the effect appears to be prolonged in nature. Consumption and investment growth also moderate due to a higher stress level. Furthermore, the forecast error decomposition indicates sustained contribution of financial stress impeding growth prospects over the forecast horizon. The findings corroborate with the financial friction mechanism. As borrowing constraint tightens during a high stress regime, the effect of financial stress moderates economic activities. Lastly, the paper extends a local projection approach for estimating a threshold VAR model as a robustness check.

The impacts of oil price volatility on financial stress: Is the COVID-19 period different?

This study analyses the effects of oil price volatility on financial stress with various measures for a large panel of countries. The study places a special focus on comparing the pattern of these effects during the Great Recession period and the COVID-19 recession period. Using the local projection approach, the paper finds that oil price volatility has a positive and persistent effect on financial stress. However, the magnitude and the degree of persistency of oil price volatility impacts on financial stress are much greater for the Great Recession period than for the COVID-19 recession period. A possible explanation for this result would be that COVID-19 is better thought of as a “natural disaster” in which companies under stress were not being mismanaged. Another explanation would be that active intervention by the government through monetary and fiscal channels reduces the sensitivity of financial instability to oil price volatility during the COVID-19 period.

Indirect Inference: A Local Projection Approach

Indirect Inference: A Local Projection Approach

A Local Projections Approach to Difference-in-Differences Event Studies

A Local Projections Approach to Difference-in-Differences Event Studies

The Impact of a “National Green Export Review” on Competitiveness: Empirical Evidence for Ecuador’s Fish Exports

Fish products comprise more than 20% of total Ecuadorian exports. Ecuador introduced the “National Green Export Review” (NGER) in 2015, which aims at making Ecuador’s fishing industry more sustainable to improve the international market access to Ecuador’s fish products. Has this policy achieved its goal? In order to answer this question, this article applies the local projection approach to explore the dynamic impact of the NGER on Ecuador’s share of fish exports in the world fish market. Contrary to expectations, the results are consistent with the view that the NGER does not enhance Ecuador’s competitiveness. The NGER is also not able to compensate for the fall in Ecuador’s share in the world fish market, which has been induced by a change in consumer preferences for tuna and shrimp, Ecuador’s main fish products. The concluding section of the paper provides policy advice on how to make the NGER more effective in achieving its goal.

Defying the Odds: Remittances during the COVID-19 Pandemic

This paper provides an early assessment of the dynamics and drivers of remittances during the COVID-19 pandemic, using a newly compiled monthly remittance dataset for a sample of 52 countries, of which 16 countries have bilateral remittance data. The paper documents a strong resilience in remittance flows, notwithstanding an unprecedent global recession triggered by the pandemic. Using the local projection approach to estimate the impulse response functions of remittance flows during January 2020–December 2020, the paper provides evidence that: (i) remittances responded positively to COVID-19 infection rates in migrant home countries, underscoring its role as an important automatic stabilizer; (ii) stricter containment measures have the unintended consequence of dampening remittances; and (iii) a shift from informal to formal remittance channels due to travel restrictions appears to have also played a role in the surge in formal remittances. Lastly, the size of the fiscal stimulus in the host country is positively associated with remittance flows to migrants’ home country as the fiscal response cushioned the economic impact of the pandemic.

Larger and Faster Exchange Rate Pass Through When the Currency Depreciates: A Local Projections Approach for the Case of Brazil

Larger and Faster Exchange Rate Pass Through When the Currency Depreciates: A Local Projections Approach for the Case of Brazil

Government investment fiscal multipliers: evidence from Euro-area countries

AbstractThis paper aims to estimate the government investment fiscal multipliers in select European countries for the period 1970–2016. To do this, we combine Structural Vector Autoregression (SVAR) modeling with the Local Projections (LP) approach. We estimate models by also controlling for fiscal foresight, excluding the postcrisis period and distinguishing between Northern and Southern countries. Our findings suggest that an increase in government investment generates a “Keynesian effect” by engendering positive and permanent effects on the GDP level, even when government expenditure expectations are considered. Fiscal multipliers are close to 1 on impact and increase in the years after the implementation of a discretionary fiscal policy.