Macroeconomic Relevance Research Articles

Reviewing the macroeconomic relevance of education system in Ethiopia: the role of skill gap

Reviewing the macroeconomic relevance of education system in Ethiopia: the role of skill gap

Investor sentiment and global economic conditions

The paper examines the macroeconomic relevance of the common component of discount rate news in firm-level stock returns for G7 countries (except for Italy, focusing on each country’s index constituents) by applying a hierarchical dynamic factor model to the Campbell and Ammer (1993) return decomposition. This approach offers advantages over alternative investor sentiment indicators and is easily extended to a larger cross-section of countries. Evidence suggests global investor sentiment leads, rather than lags, domestic sentiment and global economic conditions. Investor sentiment predicts economic conditions in-sample and out-of-sample.

Are the effects of uncertainty shocks big or small?

Previous works have reached widely divergent conclusions on the macroeconomic relevance of uncertainty shocks. We show that this disagreement reflects identification problems linked to the use of financial data in low-frequency VAR models. To bypass this difficulty, we identify uncertainty shocks using daily data and use their monthly averages as instruments in VARs. This novel identification approach captures within-month interactions between uncertainty and asset prices, providing a full picture of the pivotal role of financial markets in propagating uncertainty to the real economy. Once these interactions are accounted for, the disagreement disappears: uncertainty shocks have a small but significant impact on economic activity across specifications and identification schemes.

Remittances to Mexico. Macroeconomic and microeconomic uses

This article discusses the macroeconomic and microeconomic characteristics of Mexican remittances from 2003 to the present day. To study the macroeconomic relevance of remittances, we use the Bank of Mexico (Banxico) balance of payments from a heterodox viewpoint, and to study microeconomic relevance, we rely on the survey of international migration at the north border (EMIF Norte) regarding the flow of inland migrants coming from the United States (Procedentes de Estados Unidos-Terrestres, PEUAT). Macroeconomically, remittances are a stable flow of foreign change. They have blocked the existence of an unsustainable current account deficit and prevented crises and exchange rate depreciations. Microeconomically, remittances are national purchasing power, and they serve to increase private consumption in very important areas such as food and clothing, and health care and to reflect demographic characteristics of the remittances’ senders, such as the type of migrant who sends remittances (resident or nonresident), the sex of the migrant, and the main factors that drive remittances sent by Mexican people who are residents on US soil. This article does not fully show interconnections between the macroeconomic and microeconomics uses of remittances, nor does it stress the discrepancy between the balance of payments and national surveys in accounting for familiar remittances. Rather, we underline that a combination of sources such as the national accounts and national surveys must be carried out to understand the effects of remittances from macroeconomic and microeconomic viewpoints.

Fostering Macroeconomic Research on Hydrogen-Powered Aviation: A Systematic Literature Review on General Equilibrium Models

Hydrogen is a promising fuel to decarbonize aviation, but macroeconomic studies are currently missing. Computable general equilibrium (CGE) models are suitable to conduct macroeconomic analyses and are frequently employed in hydrogen and aviation research. The main objective of this paper is to investigate existing CGE studies related to (a) hydrogen and (b) aviation to derive a macroeconomic research agenda for hydrogen-powered aviation. Therefore, the well-established method of systematic literature review is conducted. First, we provide an overview of 18 hydrogen-related and 27 aviation-related CGE studies and analyze the literature with respect to appropriate categories. Second, we highlight key insights and identify research gaps for both the hydrogen- and aviation-related CGE literature. Our findings comprise, inter alia, hydrogen’s current lack of cost competitiveness and the macroeconomic relevance of air transportation. Research gaps include, among others, a stronger focus on sustainable hydrogen and a more holistic perspective on the air transportation system. Third, we derive implications for macroeconomic research on hydrogen-powered aviation, including (I) the consideration of existing modeling approaches, (II) the utilization of interdisciplinary data and scenarios, (III) geographical suitability, (IV) the application of diverse policy tools and (V) a holistic perspective. Our work contributes a meaningful foundation for macroeconomic studies on hydrogen-powered aviation. Moreover, we recommend policymakers to address the macroeconomic perspectives of hydrogen use in air transportation.

China’s Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?

AbstractWe study the macroeconomic relevance of credit supply effects in the transmission of Chinese monetary policy. Using combinations of zero and sign restrictions in a structural vector autoregressive framework, we simultaneously identify monetary policy shocks and supply dynamics in the loan market. Our results show that policy shocks which coincide with loan supply effects account for roughly 60% of the overall effects of policy induced output dynamics. Moreover, we find that it takes roughly one year that banks adjust their lending strategies and loan supply effects unfold completely. Overall, our results provide robust empirical evidence that the credit channel constitutes an important and economically relevant transmission channel for monetary policy in China.

Determinants of Residential Investment Growth Rate in the US Economy (1992–2019)

ABSTRACT The leading role of residential investment in the business cycles is a robust stylized fact for the US economy. The housing bubble of the 2000s has increased interest in the macroeconomic relevance of this expenditure. However, there is still controversy surrounding its determinants. This article is an attempt to fulfill this gap. We propose to combine mortgage interest rate and house price inflation — two of the most relevant variables according to the literature — in a single index: houses’ own-rate of interest. This index represents the real cost of buying houses, so we expect a negative relationship with the growth rate of residential investment. Regarding the US economy from 1992 to 2019, we find a unidirectional negative correlation between houses’ own-rate of interest and residential investment growth rate in the long run. In the short-run adjustment process, we report no statistically significant effect of residential investment growth rate on houses’ own- rate of interest. Our results are robust to lag order specification and show that houses own-rate of interest explains more than half of the variability of residential investment rate of growth.

Germany, the Eurozone crisis and the Covid-19 pandemic: Failing forward or moving on?

This article explores continuity and change in Germany’s policy towards economic and monetary integration, comparing its approach to the Eurozone crisis with its response to the economic challenges of the Covid-19 pandemic. As the largest EU member state with significant macroeconomic relevance for the whole of the Eurozone, Germany presents a critical case during both episodes. The article adopts an historical institutionalist approach to exploring policy evolution, identifying the key interests and ideas that have driven German policy. The analysis is based on the ‘failing forward’ argument, applied to German domestic politics. German policy has evolved through an incremental layering process that both facilitated and constrained the architecture of the Eurozone. The Franco-German proposal for a reconstruction fund in May 2020 seemed to conflict with a long-standing German opposition to mutualising debt. The article argues that it in fact represented a further stage in the process (layering and conversion) rather than a critical juncture or paradigm change in policy. However, the resultant Recovery and Resilience Facility may prove to be another incomplete policy response due to the deepening consequences of the pandemic and the interventions of Germany’s Federal Constitutional Court.

Double-entry bookkeeping and balance of payments: the need for developing a new approach

On the basis of the identity between each country's global imports (commercial and financial) and exports (commercial and financial), which is one of the fundamental economic principles of the balance of payments, the paper highlights why and how the leading account of transactions from/to the rest of the world needs to be reformed. As a strategic goal, the balance of payments should finally move beyond its current purely statistical and simple-entry bookkeeping approach in order to improve its macroeconomic relevance. This would also imply a new way of carrying out cross-border payments, which could in turn pave the way for a new system of international payments. The development of an economic account of the nation as a whole and the introduction of a consistent way of recording transactions following a truly double-entry bookkeeping would also erase statistical discrepancies ex ante and reflect the necessary equality (identity) of credits and debits both for all transactions taken together and for each of them separately. The balance of payments is already a powerful economic tool, but only through a money-consistent reform would it display its full potential.

Ecological pest control fortifies agricultural growth in Asia-Pacific economies.

The Green Revolution is credited with alleviating famine, mitigating poverty and driving aggregate economic growth since the 1960s. In Asia, high-input technology packages secured a tripling of rice output, with germplasm improvements providing benefits beyond US$4.3 billion yr-1. Here, we unveil the magnitude and macro-economic relevance of parallel nature-based contributions to productivity growth in non-rice crops over the period 1918-2018 (across 23 different Asia-Pacific geopolitical entities). We empirically demonstrate how biological control resolved invasive pest threats in multiple agricultural commodities, ensuring annually accruing (on-farm) benefits of US$14.6-19.5 billion yr-1. Scientifically guided biological control of 43 exotic invertebrate pests permitted 73-100% yield-loss recovery in critical food, feed and fibre crops including banana, breadfruit, cassava and coconut. Biological control thereby promoted rural growth and prosperity even in marginal, poorly endowed, non-rice environments. By placing agro-ecological innovations on equal footing with input-intensive measures, our work provides lessons for future efforts to mitigate invasive species, restore ecological resilience and sustainably raise output of global agrifood systems.

Leverage, investment, and recovery from a financial crisis: the role of debt overhang

Purpose Private investment in advanced economies contracted sharply during the downturn that followed the global financial crisis. A substantial debt overhang has been one proposed explanation for this development. This paper evaluates the role of debt overhang for the slow recovery in investment in Denmark, a country in which levels of private debt rapidly increased before the crisis. Design/methodology/approach Based on firm-level panel data, this paper evaluates the links between debt and investment dynamics for individual firms during the downturn that followed the global financial crisis. Findings High leverage contributed to a slow recovery in investment during the downturn that followed the financial crisis, in particular for small and medium-sized enterprises. The effect cannot solely be attributed to mean reversion in investment. Research limitations/implications Results point to the existence of a separate leverage or “balance sheet” channel with implications for macroeconomic volatility and financial stability. Practical implications Macroprudential or microprudential measures to counteract the build-up of excess leverage during upswings may contribute to reducing macroeconomic volatility and improving financial stability. Originality/value In contrast to previous studies, the panel dimension of data is used to take mean reversion in investment into account. The large, nationally representative panel data set allows to assess the macroeconomic relevance of the results, as well as enables subsample splits which are used to gain insights into potential mechanisms through which debt overhang impacts investment.

Venture Capital and the Macroeconomy

Abstract I develop a model of venture capital (VC) intermediation that quantitatively explains central empirical facts about VC activity and can evaluate its macroeconomic relevance. The impact of VC-backed innovations is significantly larger than suggested by observed aggregate venture exit valuations, even after accounting for large exposures to systematic and uninsurable idiosyncratic risks. The risk properties of venture capital play a quantitatively important role in both explaining empirical regularities and shaping the value of ventures’ contributions to economic growth. The model is analytically tractable and yields exact solutions, despite the presence of matching frictions, imperfect risk sharing, and endogenous growth. Received January 16, 2018; editorial decision November 7, 2018 by Editor Stijn Van Nieuwerburgh.

The macroeconomic relevance of bank and nonbank credit: An exploration of U.S. data

This paper exploits the Financial Accounts of the United States to derive long time series of bank and nonbank credit to different sectors, and to examine the cyclical behavior of these series in relation to (i) the long-term business cycle, (ii) recessions and recoveries, and (iii) systemic financial crises. We find that bank and nonbank credit exhibit different dynamics throughout the business cycle. We also examine the role of bank and nonbank credit in the creation of financial interconnections and illustrate a method to conduct macro-financial stability assessments.

Financial Literacy and Pension Planning A Comparative Study for Austria and Switzerland

This paper analyzes the impacts of financial literacy on pension planning in Austria and Switzerland. Based on survey data of 442 individuals, we explain the pension planning behavior by the level of financial literacy as well as other relevant person- and country-specific characteristics considering in particular the differences between the Austrian and the Swiss population in terms of financial literacy, contextual and socio-demographic aspects. Our results show that higher financial literacy has a clear positive impact on the level of pension planning, whereas the Swiss population is demonstrated to be more financially literate and thus better prepared for the retirement than Austrians. The same holds for elder people compared to the younger persons and men compared to women in our sample. Overall, our results provide some potentially interesting insights on the impacts of institutional differences and financial literacy on pension planning and appear to be highly relevant in light of demographic and system changes as well as the micro- and macro-economic relevance of pension savings in both countries.

The Ease of Doing Business Rank: An Assessment of its Macroeconomic Relevance

This paper examines the macroeconomic impact of World Bank’s Ease of Doing Business (EDB) rank, of increasing importance to policy makers, using simple but robust cross-country regressions. Its main findings are first that GDP per capita is negatively correlated with the EDB rank. Second, that average growth over a ten year period is negatively related to starting per capita income. It points to broad evidence linking these correlations to labour supply factors. Overall, it shows the EDB rank to have limited macroeconomic usefulness and relevance.

Trends in Fiscal Transparency: Evidence from a New Database of the Coverage of Fiscal Reporting

Although there are several measures of fiscal transparency, none provides satisfactory information on certain issues of macroeconomic relevance, including whether fiscal data are available for all of general government, whether the government reports a balance sheet, and whether spending and revenue are reported on a cash or accrual basis. Drawing on government finance statistics reported to the IMF, this paper presents a new database of fiscal transparency for 186 countries in 2003–13 and derives from it indices of the overall comprehensiveness of fiscal statistics as well as specific indices of the coverage of public institutions, fiscal flows, and fiscal stocks, respectively. It finds evidence of gradual improvement, most notably in the coverage of institutions, but most countries’ reporting remains far from comprehensive

The Macroeconomic Relevance of Credit Flows: An Exploration of U.S. Data

This paper exploits the Financial Accounts of the United States to derive long time series of bank and nonbank credit to different sectors, and to examine the cyclical behavior of these series in relation to (i) the long-term business cycle, (ii) recessions and recoveries, and (iii) systemic financial crises. We find that bank and nonbank credit exhibit different dynamics throughout the business cycle. This diverging cyclical behavior of output and bank and nonbank credit argues for placing greater emphasis on sector-specific macroprudential measures to contain risks to the financial system, rather than using interest rates to address any vulnerabilities. Finally, we examine the role of bank and nonbank credit in the creation of financial interconnections and illustrate a method to conduct macro-financial stability assessments.

The Macroeconomic Relevance of Credit Flows: An Exploration of U.S. Data

The Macroeconomic Relevance of Credit Flows: An Exploration of U.S. Data

Trends in Fiscal Transparency: Evidence from a New Database of the Coverage of Fiscal Reporting

Although there are several measures of fiscal transparency, none provides satisfactory information on certain issues of macroeconomic relevance, including whether fiscal data are available for all of general government, whether the government reports a balance sheet, and whether spending and revenue are reported on a cash or accrual basis. Drawing on government finance statistics reported to the IMF, this paper presents a new database of fiscal transparency for 186 countries in 2003–13 and derives from it indices of the overall comprehensiveness of fiscal statistics as well as specific indices of the coverage of public institutions, fiscal flows, and fiscal stocks, respectively. It finds evidence of gradual improvement, most notably in the coverage of institutions, but most countries’ reporting remains far from comprehensive.

Discussion of “uncertainty, investment and managerial incentives” by Glover and Levine

Glover and Levine provide an elegant framework to quantify the investment distortions created by managerial compensation. My discussion focuses on how one should model managers, on the potential endogeneity of managerial compensation, and on the macroeconomic relevance of the mechanism.