Macroeconomic Fundamentals Research Articles

Is there a relationship between climate policy uncertainty and green finance? Evidence from bootstrap rolling window test

This paper discusses time-varying causalities between climate policy uncertainty (CPU) and green finance market, and filling the research gap in revealing their internal dynamic connections. Using rolling-window technique, the empirical findings demonstrate that CPU exert positive and negative impact on green finance market, represented by the green bond index (GBI) during certain time intervals, which do not entirely support theoretical basis. Similarly, the study also uncovers inconsistent conclusions regarding the influence from GBI to CPU among different causal periods, indicating the function of green finance in alleviating climate change is complex. These deviations between variables can be attributed to factors, such as early-stage green bond market, shifts in climate policies, the impact of COVID-19, and underlying macroeconomic fundamentals. The study identifies heterogeneities of the causal relationships in different time intervals, and the bidirectional influence under specific circumstances, offering fresh insights for existing theoretical framework. Several policy implications are thus provided from multiple aspects, such as standardization of green bonds, innovation of green financial instruments, and development of long-term climate governance strategies. These measures can facilitate a positive role for climate policy and green finance in pursuing harmonious development.

Market risk spillover and the asymmetric effects of macroeconomic fundamentals on market risk across Vietnamese sectors

Global economic downturns and multiple extreme events threaten Vietnam's economy, leading to a surge in stock market risk and significant spillovers. This study investigates market risk spillovers and explores the asymmetric effects of macroeconomic indicators on market risk across 24 sectors in Vietnam from 2012 to 2022. We use the value-at-risk (VaR) technique and a vector autoregression (VAR) model to estimate market risks and their spillovers across Vietnamese sectors. We then examine the asymmetric effects of macroeconomic indicators on market risk using a panel nonlinear autoregressive distribution lag (NARDL) model. Our results confirm that Vietnam’s market risk increases rapidly in response to extreme events. Additionally, market risks exhibit substantial inter-connectedness across the Vietnamese sectors. The Building Materials, Technology, and Securities sectors are primary risk transmitters, whereas the Minerals, Development Investment, and Education sectors are major risk absorbers. Our results also confirm that market risk responds asymmetrically to changes in interest rates, exchange rates (USD/VND), trade openness, financial development, and economic growth in the short and long run. Minerals, Oil & Gas, and Rubber are the sectors that are most affected by macroeconomic indicators in the long run. Based on these important findings, implications focused on limiting market risks and their spillovers, along with sustainable investing, have emerged.

Comparative analysis of different approaches to the Ukrainian residential property market evolution modelling and its forecast for the years 2019–2024

PurposeThis study aims to provide a comprehensive analysis of various approaches to the residential property market evolution modelling and to examine the macroeconomic fundamentals that have shaped this market development in Ukraine in recent years.Design/methodology/approachThe study uses a comprehensive data set encompassing relevant macroeconomic indicators and historical apartment prices. Multifactor linear regression (MLR) and ridge regression (RR) models are constructed to identify the impact of multiple predictors on apartment prices. Additionally, the ARIMAX model integrates time series analysis and external factors to enhance modelling and forecasting accuracy.FindingsThe investigation reveals that MLR and RR yield accurate predictions by considering a range of influential variables. The hybrid ARIMAX model further enhances predictive performance by fusing external indicators with time series analysis. These findings underscore the effectiveness of a multidimensional approach in capturing the complexity of housing price dynamics.Originality/valueThis research contributes to the real estate modelling and forecasting literature by providing an analysis of multiple linear regression, RR and ARIMAX models within the specific context of property price prediction in the turbulent Ukrainian real estate market. This comprehensive analysis not only offers insights into the performance of these methodologies but also explores their adaptability and robustness in a market characterized by evolving dynamics, including the significant influence of external geopolitical factors.

Bond market spillover networks of ASEAN-4 markets: Is the global pandemic different?

This study explores the interconnectedness of bond markets in the Association of Southeast Asian Nations (ASEAN-4: Indonesia, Malaysia, the Philippines, and Thailand) with significant regional and global markets, focusing on transmitting global shocks to these markets. The analysis is based on the forecast error variance decomposition (FEVD) of a vector autoregression (VAR) model and wavelet-based longer horizon approaches, enabling us to identify the net transmitter and receiver of return and volatility shocks among the underlying markets at various investment horizons. In addition, we evaluate the primary drivers of ASEAN-4 bond markets, employing global and ASEAN-4 macroeconomic indicators and uncertainty measures to explain variations in the spillover dynamics. Empirical findings reveal strong inter-country connectedness among bond markets, with the U.S. market having the most significant links for 7- and 10-year bond maturities. However, there is limited connectedness within ASEAN-4 and other developing countries, indicating strong diversification potential. Furthermore, our findings indicate increased interconnectedness during COVID-19 and that macroeconomic fundamentals significantly influence the ASEAN-4 markets, rationalizing the heterogeneous cross-border transmission of uncertainty shocks. The findings contribute to the literature on bond market spillovers, offering valuable insights for policymakers, regulators, and investors seeking portfolio diversification, risk management, and sustainable growth in the ASEAN-4 markets.

Business Cycles in Africa: Unravelling the Dynamics of Sub-saharan Africa's Economic Growth

This research delves into the intricate dynamics of Africa's economic landscape against the backdrop of the global economic surge, surpassing rates unseen since the oil price shocks of the 1970s. The study shows a continuous period of robust global growth since 2004, characterized by low inflation and even distribution among nations, defying expectations given the increasing contribution of unstable emerging markets. The study sheds light on Africa's evolving economic scenario, marked by a growing awareness of sectoral fragmentation, oil price variation, and infrastructure development. Examining macroeconomic fundamentals in 2022, we note improvements in fiscal deficits but an increase in current account deficits, exchange rate fluctuations, and elevated inflation, driven by global factors. Moreover, the study unveils the enduring fragility of Africa's economic and social situation, affected by armed conflicts, unfavorable weather conditions, and declining trade. Despite abundant natural resources, the region contends with persistent poverty, positioning it as one of the most impoverished globally. The plots highlighted the historical economic gaps, emphasizing the formidable hurdles that have impeded Sub-Saharan Africa's growth, particularly in comparison to East Asia & Pacific and Latin America & Caribbean. The disparities underscore the need for strategic interventions, including diversifying export bases, strengthening fiscal management, and promoting inclusive growth. The study concludes with a call for coordinated efforts to address the complex challenges, fostering sustained and inclusive economic growth across the continent.

Economic sentiment and foreign portfolio flows: Evidence from Türkiye

The notable surge in capital flows in recent years has emerged as a key factor shaping the dynamics of international financial markets and influencing economic performance of emerging economies. Even though macroeconomic fundamentals of an economy can explain some of the patterns in international capital flows, behavioral factors also seem to be essential for positioning capital flows across countries. In this study, we aim to examine whether overall economic sentiment towards Turkish economy plays a significant role on net portfolio flows to Türkiye. To this end, we first construct a novel text-based sentiment index called "Turkish Economic Sentiment Index (TESI)", to capture the behavioral tendencies of international investors and media towards Türkiye. Our subsequent step integrates TESI into autoregressive distributed lag models (ARDL) alongside major pull-push determinants to assess whether market sentiment holds discernible influence on capital influx into Turkey. The results reveal that the TESI and VIX stand out as pivotal determinants influencing international portfolio flows. The TESI has a positive impact on portfolio flow dynamics, whereas the degree of global risk aversion inversely affects these flows. These findings align with the contention that a favorable sentiment can boost portfolio inflows to emerging markets. Conversely, heightened volatility expectations in global markets can prompt outflows from these economies.

Oligopoly and exchange rate dynamics in Nigeria

We examine the short-run and long-run oligopoly - exchange rate nexus, with a focus on access to forex in Nigeria, using the Autoregressive Distributed Lag (ARDL) model; controlling for other macroeconomic fundamentals (inflation rate, interest rate, oil price, and net trade balance). Oligopoly is defined using the Herfindahl-Hirshman Index (HHI) on the sectoral utilization of foreign exchange in Nigeria. While the concentration in forex allocation to firms and industries became oligopolistic between 2014 and 2015, the Naira/USD exchange rate also recorded a jump from N164.8/US$ to N195.5/US$; indicating possible association. Oligopoly in forex allocation in Nigeria caused a weakly (strongly) significant appreciation (depreciation) in the exchange rate in the short-run (long-run). Imperatively, the exchange rate benefits of forex allocation to selected big firms are not sustainable. Net trade balance and oil price also reduced the pressure on Nigeria's forex market and stimulated potential Naira appreciation, but only in the short run; suggesting the need to diversify the economy from reliance on oil-based trade and embrace a more sustainable trade path.

The Effect of Macroeconomic Fundamentals, Capital Structure, Financial Performance, and Company Size on Investment Decisions in Automotive Companies listed on the Indonesia Stock Exchange

This research aims to examine and analyze the influence of macro fundamentals of capital structure, financial performance and company size on investment decisions in automotive companies listed on the Indonesian Stock Exchange. The type of research carried out was quantitative with secondary data sources obtained from the Indonesian Stock Exchange. The population in this research is automotive companies listed on the Indonesia Stock Exchange, totaling 12 companies. This research uses SmartPLS. The results of this research show that macro fundamentals have a positive and significant influence on investment decisions, macro fundamentals have a positive and significant influence on financial performance, macro fundamentals have a negative and significant influence on capital structure, macro fundamentals have a negative and significant influence on company size, financial performance has a negative and significant influence on investment decisions, capital structure has a positive and significant effect on investment decisions, company size has a positive and significant effect on investment decisions.

Does exchange rate misalignments lead changes in macroeconomic fundamentals?

This article aimed at verifying the reliability of equilibrium exchange rate (EER) concepts by exploring if exchange rate misalignments are leading to changes in macroeconomic fundamentals. The authors focused on G10 currencies and the three most popular EER models which the IMF regularly uses within the External Balance Assessment: Purchasing Power Parity, Behavioural EER and Fundamental EER. In methodological terms, the study applied the cross-sectional predictability approach developed by Sarno and Schmeling (2014), which ranks countries on the basis of the scale of EER misalignment to check if this ranking helps to predict key macro variables. The results indicate that EER misalignment contains cross-sectional predictive power and allows forecasting real effective exchange rates, short-term interest rates and current account balance differences across countries.

Diamond and Dybvig in developing economies and in a digital world

The Nobel prize-winning article of Douglas Diamond and Philip Dybvig, entitled “Bank runs, deposit insurance, and liquidity” and published by the Journal of Political Economy in 1983, has spawned a large literature, including on emerging markets and developing economies. In a nod to Diamond and Dybvig, this paper reviews this subset of the literature, which has received relatively less attention than the rest despite the greater risk of banking crises in these economies; it then examines whether the seminal article remains relevant against the rapid digital transformation of financial systems today. Models that adopted their basic ideas helped drive home the importance of maintaining sound macroeconomic fundamentals and keeping confidence levels high in bank-centered economies. Similarly applying their framework to assess the impact of the current evolution of financial systems also reveals valuable insights, such as low risk from financial technology, for now, but possible shadow banks in those settings, and allows for generally better analysis, including pointing out possible blind spots when adopting new concepts, such as central-bank-issued digital currencies.

Returns, Political Developments and Economic Forces: A Historical Perspective on the Johannesburg Stock Exchange (Jse): 2010 - 2020

To contribute to economic growth and development, a stock market, as a leading economic indicator, should reflect the macroeconomic fundamentals of a country by reacting to political, economic and other significant events via return adjustments for companies listed on the stock market. This article aims to provide a historical perspective on how political and economic events reflected in returns on the Johannesburg Stock Exchange (JSE) between 2010 and 2022. An event study methodology establishes whether the top 20 best and worst weekly return periods on the JSE all-share index (ALSI) coincided with local and international events. The performance of the JSE during this period is dominated by events related to recovering economies and stock markets after the Global Financial Crisis, substantial influence by the U.S. and China, and the devastating effect of the COVID-19 pandemic during 2020. The study concludes that although the JSE clearly and immediately reflected global macroeconomic and political changes, it responded little, or for long, to local developments. However, these local developments and structural deficiencies collectively caused share market performance in South Africa to disconnect from the developed world since 2013, contributing to poor local market performance, reduced investor confidence and increased capital outflows.

Macroeconomic Fundamentals and the Volatility of Foreign Investors’ Net Purchase in Korean Stock Market

We employ the GARCH-MIDAS model to examine whether low-frequency macroeconomic variables help to explain the high-frequency volatility of the foreign investors’ net purchase in Korean stock market. The estimation results show that business cycle expansion along with high production growth, high inflation and low unemployment rate predicts high volatility in the near future. Higher interest rate and lower money growth are also likely to lead to higher volatility of foreign investors’ net purchase. We also find that domestic macroeconomic variables, relative to the US variables, have a stronger correlation with the future volatility of foreign investors’ net purchase.

The dynamic effect of macroeconomic factors on housing prices: Evidence from South Africa.

This study examines the dynamic short- and long-run causal relationship between South African real house prices and key macroeconomic fundamentals (gross domestic product(GDP), mortgage rate, exchange rate-USDZAR, affordability, household debt to disposable income, unemployment rate, share prices (JSE ALL share index), foreign direct investment, and producer price index) over the period 2000Q1-2019Q4. The study uses a vector error correction model (VECM) to estimate the relationships while accounting for endogeneity and reverse causality. Although, there seems to be a significant association(both short and long-run) between house prices and all macroeconomic fundamental variables, GDP and producer price index appear to have the greatest impact. Further, our results suggest that any short-term disequilibrium in house prices always self-corrects in the long-run.

Changing determinant driver and oil volatility forecasting: A comprehensive analysis

Academic research relies on exogenous drivers to enhance the accuracy of forecasting oil volatility. Following the relevant literature, this study collects 62 exogenous drivers that reflect the movements of oil demand, oil supply, oil inventory, macroeconomic fundamentals, financial indicators, and measures of uncertainty. Our empirical results indicate that dimension reduction regressions, especially principal component analysis regression (PCA), successfully predict both WTI and Brent oil volatility at the one-month ahead forecast horizon. Shrinkage methods, on the other hand, outperform their counterparts for medium- and long-term forecast horizons. Furthermore, the unsupervised learning method (PCA) achieves superior forecasting performance during periods of oil price decrease, whereas supervised learning methods (i.e., shrinkage methods) significantly improve volatility accuracy. Additionally, the empirical results reveal that movements in the Kilian index, World industrial production index, global economic conditions index, U.S. steel production, Chicago Fed national activity index, capacity utilization for manufacturing, U.S. default yield spread, and MSCI emerging market index have a significant impact on oil volatility.

Macroeconomic fundamentals and attention: What drives european consumers’ inflation expectations?

Using survey data on consumer inflation expectations in the European Union countries, we investigate the price, macroeconomic, attention, and geopolitical determinants of European consumers’ inflation expectations. We employ panel data regression with both fixed and random effects. We conclude that when consumers in the EU form their expectations regarding future inflation, they are determined not only by past inflation and the general macroeconomic situation, but also by selected attention variables expressing their search queries on the Internet (SVI based on Google Trends), and uncertainty concerning economic policy (EPU) steps and measures. Moreover, our baseline specification also suggests that inflation expectations of consumers in the Central and Eastern European countries are higher than those in Euro Area countries. These findings are robust to multiple specifications using individual survey indicators of expected inflation.

Role of Bank Credit and External Commercial Borrowings in Working Capital Financing: Evidence from Indian Manufacturing Firms

Determinants and levels of working capital financing (WCF) in the manufacturing sector have been empirically proven to impact firm profitability across emerging as well as developed nations. With time, firms adjust toward financing their working capital requirement (WCR), although the speed of adjustment, financing constraints, and bargaining power are subject to variations. In this study, we estimate the effect of bank credit and firm foreign currency borrowing on working capital financing with three distinct models for manufacturing firms in India. We examine the relationship between short-term foreign currency borrowings and WCF. Further, we investigate if the internal capital market affects WCF in the form of business group affiliation; lastly, we assess the impact of bank dependency and financial distress on WCF. We conclude that the debt–equity ratio becomes relevant, whereas firm characteristics such as age, size, and asset tangibility become irrelevant. Our original contribution to the literature is the finding that even smaller emerging market firms with well-managed, low debt exposure have improved access to WCF. Our results support that financial distress negatively impacts WCF but deviates from macroeconomic fundamentals, such as the GDP growth rate. This indicates deterioration in the health of Indian manufacturing, as a capital-intensive sector. Bank dependency remains significant, wherein smaller firms and those without a dividend pay-out continue to have longer cash conversion cycles and less efficient WCR. As a unique finding, we note foreign currency borrowings significantly contribute to WCF in the case of less developed credit markets in emerging economies such as India.

Currency reform, currency biases and Ghana’s forex market fluctuations: Beyond the macroeconomic fundamentals

Currency reform, currency biases and Ghana’s forex market fluctuations: Beyond the macroeconomic fundamentals

Determinants of market‐assessed sovereign default risk: Macroeconomic fundamentals or global shocks?

AbstractThis paper investigates the macroeconomic fundamentals that international investors consider crucial when assessing a country's default risk. Using panel data for 41 countries over the period 2002–2019, we find that the macroeconomic determinants of a sovereign credit default swap (CDS) are heterogeneous across developed and developing economies after controlling for potential endogeneity. While international investors consider government budget balance and inflation as crucial elements in the evaluation of the CDS of developed economies, more stress is placed on economic growth and foreign reserves in the assessment of the creditworthiness of developing economies. Furthermore, we document that better institutional quality reduces the sovereign default risk in both developed and developing economies. However, global shocks appear to have a strong impact in developing economies. The results remain robust to various specifications.

Mapping the Causal Connections among Exchange Rate Indicators and Exchange Rate: New Evidence from NARDL Econometric Approach

The aim of the study is to find out the symmetric or asymmetric relationship betweenthe macroeconomic fundamentals and exchange rate of Pakistani Rupee against the US Dollar which has never been analyzed briefly in previous literature. The NARDL approach hasbeen applied with the selected macroeconomic fundamentals i.e., GDP, foreign reserves, inflation rate, interest rate, oil price, gold price, trade balance, and money supply for thedata analysis. The data of exchange rate and selected macroeconomic fundamentals havebeen taken during the time period of 2011 to 2022 from the official IMF IFS database. Thefindings indicate that foreign reserves and inflation possess an asymmetric relationship withthe exchange rate in long run. The increase in productive inflation only helps to stabilize theexchange rate whereas all other significant variables weakens the Pakistani currency eitherin short -run or long run i.e., decrease in money supply, GDP, inflation and increase in interestrate. The findings will be helpful for the policymakers and economists to implement theirpolicies accordingly to prevent the further depreciation the of Pakistani Rupee against USDollar.

Do the dynamics of macroeconomic attention drive the yen/dollar exchange market volatility?

With financial liberalization and economic globalization, international trade balance has become an important channel to increase a country's fiscal revenue. To facilitate global trade, exchange rate markets are an indispensable means of currency circulation, and research on volatility is also a hot topic worldwide. To reveal the impact of different types of macroeconomic fundamentals on foreign exchange market volatility, this study uses eight fundamental indicators for macroeconomic attention indices (MAIs) proposed by Fisher et al. (2022) to explore their impact on the volatility of the yen/dollar rate while considering the asymmetric case of short-term volatility. The results show that the dynamics of the MAIs affect yen/dollar rate volatility, with almost all the MAIs having significantly positive coefficients. The results of the MCS test confirm that considering both asymmetric effects and MAI information improves the predictive accuracy of the model. This result is robust to alternative tests, alternative sample lengths, and alternative MAI indicators. Overall, the empirical results highlight the value of incorporating asymmetric effects and MAI indicators in forecasting yen/dollar rate volatility. This finding is of self-evident importance for promoting the balance of payments, regulating currency flows, and developing a country's economy.