Macroeconomic Contraction Research Articles

A tale of two life stages: The imprinting effect of macroeconomic contractions on later life entrepreneurship

Studies argue that macroeconomic contractions create immediate incentives for individuals to pursue entrepreneurship. However, research has not addressed whether past macroeconomic contractions imprint on individuals and influence their future entrepreneurship. Integrating literature on the business cycle and imprinting with insights from lifespan psychology, we develop and test competing theoretical arguments aligned to two distinct life stages about when a macroeconomic contraction will imprint on individuals to influence their future entrepreneurship, and how such effects are imprinted. Our findings show that only contractions experienced during early adulthood influence entrepreneurship and this effect is transmitted culturally via country-level preferences for time discounting.

International Spillovers and Bailouts

Abstract We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in other countries, which motivates a bailout. But why do creditor countries choose to bailout debtor countries instead of their own private sector? We show that this is because an external bailout could be cheaper than a domestic bailout. We also show that although anticipated bailouts lead to higher borrowing, they can be Pareto improving not only ex post (after a country has defaulted) but also ex ante (before the country chooses its debt).

Diversidad productiva, sectores difusores de progreso técnico y desempeño regional en Argentina entre 2008 y 2018

This paper empirically analyzes the incidence of productive diversification on regional performance in Argentina between 2008 and 2018. Assuming that spillovers between productive activities requires proximity in the knowledge base, a distinction is made between related and unrelated productive diversification, which are estimated using entropy indicators. Econometric estimations are performed to explain the dynamics of employment and wages (as proxy for productivity) by the levels of related and unrelated regional diversification. Findings suggest that related diversification has a positive impact on employment and wage dynamics at the regional level, while unrelated diversification contributes to maintaining regional employment during macroeconomic contractions. No empirical evidence is found supporting that general purpose technology (such as mechanical engineering and ICTs) enhances the effects of related diversification on regional performance. It is observed, however, that the software sector enables the presence of externalities between technologically distant activities.

Fiscal and monetary policies supporting the tourism industry during COVID-19

PurposeSince the first moment of the pandemic, national and international travel restrictions are in place to reduce human mobility. This actual situation makes the tourism industry one of the areas most affected by the pandemic. Many microeconomic factors (households and firms) were adversely affected by the pandemic, and this situation brought about macroeconomic contraction. Naturally, governments seek to sustain production and employment by offering financial packages to reduce the negative economic effects of the pandemic. Given such information, the study aims to examine the financial policies implemented by countries to support the tourism industry during the pandemic period.Design/methodology/approachContent analysis, which is a technique of qualitative research method, was applied in the analysis process of the data. Assessments were made based on data published by the United Nations World Tourism Organization (UNWTO) on the financial and monetary policies implemented by countries to support the tourism industry. The data were analyzed using the MAXQDA qualitative analysis program.FindingsAccording to the results of the study, countries support the tourism industry financially in terms of credit and liquidity. Also, tourism investments are encouraged by tax breaks and low interest rates.Originality/valueIt is aimed to determine what issues the financial and monetary policies published by the UNWTO focus on to solve the problems in the tourism sector. In this way, it is thought that the study will reveal the problems experienced by tourism enterprises during the pandemic period with a holistic perspective.

Welfare Costs of Catastrophes: Lost Consumption and Lost Lives

Abstract Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of life can be expressed as a welfare-equivalent drop in consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and ‘willingness to pay’ (WTP) to avoid them. Using estimates of the ‘value of a statistical life’ (VSL), we find the WTP to avoid major pandemics, and show that it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.

Welfare Costs of Catastrophes: Lost Consumption and Lost Lives

Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of can be expressed as a welfare-equivalent drop in wealth or consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and willingness to pay (WTP) to avoid them. Using estimates of the value of a statistical life (VSL), we find the WTP to avoid major pandemics, and show it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.

The Effect of CEOs' Overconfidence on Performance during Macroeconomic Recessions

Despite decades of analysis on the effect of recessions on firms' financial performance, managers often fail to implement strategies that research has proven to be successful when facing macroeconomic contractions. We analyze the effect of CEOs' overconfidence on the performance of their companies during macroeconomic recessions. In general, overconfidence biases CEOs' decisions, leading them to overinvest in low-value projects and underestimate risk, therefore decreasing firm's organizational and financial flexibility. During recessions, firms require a greater ability to adapt to organizational changes, as there are greater nontrivial pressures on companies' profitability. Therefore, we contend that a CEO's overconfidence is especially dangerous to the performance of his/her company during a recession. We also argue that a CEO with previous experience in that position during an economic recession can help mitigate the negative effect of overconfidence. Empirical results from 214 industries in the US during the period 1992 - 2015 strongly support our reasoning.

Examining relationship between composite leading indicators and Borsa Istanbul sector indices

The prediction of fluctuations in economic activity has become even more important, especially after the crises experienced in recent years. In order to make such a prediction, economic and financial indicators are needed. The Composite Leading Indicators (BONC) published by Central Bank of the Republic of Turkey is useful in predicting the macroeconomic contraction or expansion. In this study, it is tested whether there is a relationship between Composite Leading Indicators Index and 12 Borsa Istanbul sector indices returns. Unit root test results show that sector indices are stationary at the first differences and the BONC is at level. Thus long term relationship between each sector indices and the BONC is examined by Boundary Test. The findings show that there is a long term and relationship between BONC and all the sector indices in the study. Also it has been determined that positive change in the BONC has a statistically significant and positive effect on XUTEK and XGMYO in the long term. The short term relationship is also found between all sector indices and BONC. In addition, it is determined that increase in BONC affects all sector indices positively in the short term. These results indicated that investors take into account the BONC without distinguishing the sector when investing to stocks and that BONC is an important indicator for stock returns.

Do macroeconomic contractions induce or ‘harvest’ suicides? A test of competing hypotheses

BackgroundResearchers often invoke a mortality displacement or ‘harvesting’ mechanism to explain mortality patterns, such that those with underlying health vulnerabilities die sooner than expected in response to environmental phenomena, such...

Keynes’s General Theory After 75 Years: Chapter 24 and the Character of ‘Keynesian’ Policy*

The Great Financial Crisis led to a revival of interest in ‘Keynesian’ economic policy, understood as temporary, debt‐financed fiscal activism in response to a short‐run, albeit particularly deep, macroeconomic contraction. But Keynes’s theory led him to diagnose involuntary unemployment as a long‐run problem, and one for which competition (via wage and price flexibility) was not a solution. Consequently, his policy proposals were more far‐reaching than short‐run fiscal activism. The final chapter of The General Theory provides the appropriate point of departure for reflecting on the difference between Keynes’s policy position and what later came to be regarded as Keynesian policy.

Are Heuristics Better than Theory if Market Crashes are Possible?

Financial advisers often recommend that investors should place (100 − age) % of their wealth in a well-diversified equity portfolio. Another popular approach is based on the complete markets model with CRRA utility and i.i.d. returns which implies a constant portfolio share invested in stocks. I solve a calibrated life-cycle model with stochastic labor income and rare disasters to investigate the welfare costs of constraining portfolio allocations to mimic these heuristics. When there is a possibility of a stock-market crash accompanied by a macroeconomic contraction, the simple rules of thumb outperform the more sophisticated dynamic programming rule that ignores the risk of rare disasters. The annual utility loss of following the complete markets solution amounts to only 0.5% relative to the optimal allocation. The (100-age)% rule also generates reasonably small welfare losses. In contrast, ignoring disasters can impose a cost as high as 5%.

Life-Cycle Portfolio Allocation When Disasters are Possible

JEL classifications: D91, E21, G11 In contrast to the predictions of life-cycle models with homothetic utility and risky labor income, the majority of US households do not hold any wealth in the stock market. Even among stockholders, the equity share out of net worth is modest. I develop a life-cycle model in which there are rare disasters, calibrated to match the joint empirical distribution of stock market crashes and macroeconomic contractions. The model provides an explanation for the low portfolio share in equity. About half of the decrease in stock holdings can be attributed to the correlation between stock market crashes and depressions. Furthermore, a 6% perceived probability of disaster is sufficient to deter the median household from investing in stocks during its working life. Small differences in expectations lead to dramatically different portfolios, consistent with the heterogeneity of asset allocation in data.

Banking System Bailout - Scandinavian Style

This article reflects on some of the banking crisis resolution measures taken by the Swedish and Norwegian governments during the Scandinavian banking crisis of the early 1990s. Much as in the U.S. in 2008, the Scandinavian crisis two decades ago was preceded by a broad relaxation of bank lending standards, followed by a dramatic increase bank lending, decline in household savings, and a rise in housing prices. A decline in oil prices caused a macroeconomic contraction in (oil-exporting) Norway, which shook an already fragile banking system. Norway and Sweden chose two somewhat different routes to crisis resolution, both involving government intervention and both quite successful: The Norwegian government injected a hybrid debt-equity capital in the largest commercial bank but only after extinguishing old equity claims. The Swedish government issued a system-wide debt guarantee and allowed shareholders to maintain their equity stakes provided they also added new bank equity capital. In one bank, where equity-holders refused to participate, the government took over the bank and split it into a “good” and a “bad” part – the latter holding the non-performing loans. Lessons from Scandinavia are interesting today also because the recent U.S. banking system bailout, after some initial trial and errors, also ended up with government ownership of shares in financial institutions. I comment on the question of how the U.S. government, having effectively become “owner of last resort” in key financial institutions today, should handle its controlling equity stakes.

The performance implications of relationship banking during macroeconomic expansion and contraction: a study of Japanese banks' social relationships and overseas expansion

We propose a social perspective emphasizing the opportunities and constraints of bank–firm relationships to understand the determinants of relationship banks' performance, using Japanese banks to test our theory. Using social exchange and role theories, we found banks that have strong social relationships performed differently during Japan's macroeconomic expansion and contraction cycles. However, our results indicate that social exchange and role relationships are context-specific: banks benefited from internationalization during a domestic macroeconomic expansion as a result of their home-country social relationships, but they were less constrained by the same social relationships in their international operations during a domestic macroeconomic contraction.

How do policy and information shocks impact co-movements of China’s T-bond and stock markets?

We investigate the impacts of policy and information shocks on the correlation of China’s T-bond and stock returns, using originally the asymmetric dynamic conditional correlation (DCC) model that allows for the coexistence of opposite-signed asymmetries. The co-movements of China’s capital markets react to large macroeconomic policy shocks as evidenced by structural breaks in the correlation following the drastic 2004 macroeconomic austerity. We show that the T-bond market and the bond–stock correlations bear more of the brunt of the macroeconomic contractions. We also find that the bond–stock correlations respond more strongly to joint negative than joint positive shocks, implying that investors tend to move both the T-bond and stock prices in the same direction when the two asset classes have been hit concurrently by bad news, but tend to shift funds from one asset class to the other when hit concurrently by good news. However, the stock–stock correlation is found to increase for joint positive shocks, indicating that investors tend to herd more for joint bullish than joint bearish stock markets in Shanghai and Shenzhen.

How Do Policy and Information Shocks Impact Co-Movements of China's T-Bond and Stock Markets

This paper investigates the impacts of policy and information shocks on the correlation of the Chinese T-bond and stock returns, and to this end we propose a new version of the asymmetric Dynamic Conditional Correlation (DCC) model that allows for the coexistence of asymmetries in opposite directions. The co-movements of the Chinese capital markets react to large macroeconomic policy shocks as evidenced by structural breaks in the correlation following the drastic 2004 macroeconomic austerity measures. There is significant evidence that the T-bond market and the bond-stock correlations bear more the brunt of the macroeconomic contractions. It is also documented that the bond-stock correlations respond asymmetrically to joint bad news, while the stock-stock correlation to joint good news.

STRUCTURAL INFLATION AND THE 1994 ‘MONETARY’ CRISIS IN CHINA

This paper examines the 1994 inflation in China, which occurred at a time when the government was vigorously conducting macroeconomic contraction. The event deserves more attention for both academic and policy research reasons. The paper shows that the inflation was led by food price increases, a step of price reform intended to adjust relative price ratios to the equilibrium level. The nature of the inflation was structural rather than monetary. This kind of structural inflation is common in transitional economies. Indeed, it largely characterizes chronic price increases that have occurred in such countries. A proper monetary policy curbing inflation should take into account the structural factor. Monetary growth should be targeted to the extent that it accommodates structural adjustment but does not cause pure monetary inflation.

The effects of the Mexican economic crisis on trade and employment in the United States

During late 1981 Mexico began experiencing a rapid deterioration in its current account balance which is frequently associated with an overvalued exchange rate. The government's initial reaction to this problem was to increase its official intervention in the foreign exchange market. This policy was abandoned in early 1982 as Mexico's international reserves were depleted by falling export revenues, capital flight, and an inability to obtain further loans in international credit markets. The adjustment program which followed included three devaluations of the peso, exchange controls, reduced import tariffs to mitigate the inflationary effects of the devaluation, and tighter monetary and fiscal policies. In response to this austerity program Mexico was able to obtain short-term loans from foreign central banks, U.S. government agencies, and multi-lateral institutions. Unfortunately, neither the adjustment programs nor the assistance it received from abroad was sufficient to prevent the foreign exchange crisis from creating a severe macroeconomic contraction. While the effects of the foreign exchange crisis on Mexico's current account balance and domestic economy are well known, the effects on the U.S. economy have not been as widely addressed. This neglect is understandable as most work on the international transmission of economic disturbances focuses on the relationships among developed countries (DCs) and implicitly assumes that a disturbance emanating from a less developed country (LDC) would have a trivial impact on DC. However, Mexico is the third largest trading partner of the U.S. While the economic disturbance in Mexico may not have a large impact on the U.S. as a whole, it should have a measurable impact on U.S. trade with Mexico and, by extension, employment in export and import competing sectors.

Macro-Economic Contractions, Social-Welfare Programs & Congressional Election Outcomes

Since Gerald Krammer's pioneering work, the influence of macroeconomic conditions on the partisan division of the national congressional vote has been studied extensively.' With few exceptions these studies find that the congressional party of the incumbent president is punished for economic contractions which occur during the year prior to an election. Moreover, many find that the incumbent president's congressional party is rewarded for an economic expansion during this same period. Beyond these general conclusions, the literature is marked by controversy and contradictory findings, stemming in part from the use of different variables, models, and statistical procedures. However, all of these studies share at least one common feature. They all assume that the impact of economic conditions is constant over time. That is, they assume that an economic contraction of similar magnitude in 1898 and 1962, for example, would cause the presidential party's share of the congressional vote to fall below its normal level by similar margins. But this assumption fails to note that the context within which macroeconomic conditions are experienced have changed over time. One important contextual change is the creation of a social-welfare state. It seems reasonable to hypothesize that the level of economic deprivation that individuals experience during periods of economic contraction and the anxieties they feel about their economic situation during such periods