Macroeconomic Volatility Research Articles

Africa's Great Moderation

Abstract Over the past 30 years, African economies have experienced remarkable improvements in macroeconomic conditions, characterised by higher and more stable real per-capita growth rates and lower and more stable inflation. This paper documents the persistent decline in macroeconomic volatility at the aggregate and sectoral levels and seeks to provide explanations. Sectoral analysis shows a particularly strong reduction of growth volatility in agriculture and, to a lesser extent, in services. Classical structural change only explains a small fraction of the moderation. Analysis of further factors yields that changes in structural characteristics such as institutions, trade intensity and diversification, natural resource dependence or conflict incidence do not explain the moderation. On the positive side, the paper provides evidence to suggest that changes in the external environment, improved macroeconomic policy frameworks and ‘softer’ structural improvements, such as the deepening of the domestic financial sector, were important in reducing macroeconomic volatility on the continent.

External shocks and macroeconomic volatility in Nigeria: does financial development moderate the effect?

PurposeMotivated by the negative effect of external shocks on the domestic economy, this study explores the role of financial sector development in absorbing the effect of external shocks on macroeconomic volatility in Nigeria.Design/methodology/approachAutoregressive distributed lag and fully modify ordinary least square are used to examine the moderating effect of financial development in the link between external shocks and macroeconomic volatilities in Nigeria between 1986Q1 and 2019Q4. External shock is proxy using oil price shock, and financial development is proxy by domestic credit to the private sector and market capitalisation. At the same time, macroeconomic volatility is proxy by output and inflation volatilities. Macroeconomic volatilities are generated using generalised autoregressive conditional heteroskedasticity (GARCH 1,1).FindingsThe results indicate that domestic credit to the private sector significantly reduces output and inflation volatilities in Nigeria in the short and long run. However, market capitalisation promotes macroeconomic volatility. More specifically, financial development indicators play different roles in curtaining macroeconomic volatilities. The results also reveal that external shocks stimulate macroeconomic volatility in Nigeria in the short and long run. Nevertheless, the effects of external shocks on macroeconomic volatilities are reduced when the role of financial development is incorporated.Practical implicationsThis study, therefore, concludes that strong financial sector development serves as a significant shock absorber in reducing the adverse effect of external shock on the domestic economy.Originality/valueThis study contributes to the extant studies by introducing a country-specific analysis into the empirical examination of how financial development can moderate the influence of external shock on macroeconomic volatilities.

Solving the insolvency of troubled banks: a theoretical and applied aspect

The European election of Ukraine takes place in the context of scaling military conflicts, global shifts from geo-economic fragmentation, and new economic challenges that require the determination of the legal status of the participants in insolvency relations, procedures of temporary administration, financial rehabilitation, and liquidation of banks. Methodological and applied approaches are characterized to track the growth of Ukraine's external financial vulnerability and the specific weight of cross-border banking operations in European integration. It is found that it is essential to determine the impact of gross flows on financial stability, geographical and financial determinants of cross-border banking requirements, and the impact of internal, external, and global factors. In the applied aspect, it is argued that in the event of insolvency, banks will use the same rights for protection, regardless of whether these measures were adopted under EU or national law. It was established that Ukraine's entry into international business cycles would spread financial innovations between countries, forming a critical channel for the transmission of financial shocks. The macroeconomic volatility of economies influences the occurrence of bank insolvency; the uncertainty of the macroeconomic situation affects the market balance and complicates the regulator's road maps. It was determined that monitoring trends between insolvency and illiquidity is expedient to form an additional equity buffer to cover additional costs. It was established that it is expedient to systematize measures to prevent insolvency from resolving the insolvency of problem banks and financial recovery considering modern realities; improve the efficiency of financial liability management; negotiations with debtors; protect the interests of managers and shareholders; consulting on issues of international insolvency. Keywords: bank insolvency, financial security, banking supervision, resolution tools, financial sector, financial recovery, capital, risks, creditors.

Aggregate Skewness and the Business Cycle

Abstract We develop a data-rich measure of expected macroeconomic skewness in the US economy. Expected macroeconomic skewness is strongly procyclical, mainly reflects the cyclicality in the skewness of real variables, is highly correlated with the cross-sectional skewness of firm-level employment growth, and is distinct from financial market skewness. Revisions in expected skewness lead to business cycle fluctuations nearly indistinguishable from those induced by the main business cycle shock of Angeletos et al. (2020). This result is robust to controlling for macroeconomic volatility and uncertainty, and alternative macroeconomic shocks. Our findings suggest an important role of higher-order dynamics for business cycle theories.

Technology diffusion and international business cycles

This paper shows that the cross-country diffusion of innovations forms a critical channel through which macroeconomic shocks are transmitted across economies. This inference is obtained from a two country, medium scale DSGE model that includes an endogenous growth mechanism. R&D activity and innovation are the main components of this mechanism and they are introduced through a labor-augmenting technology. The model features international diffusion of technologies as the innovations by a firm are not only adopted by other firms within a country but also by those in the other country. Estimating the model with US and Euro Area data, I observe that foreign shocks contribute a high share to the macroeconomic volatility in each economy. By contrast, foreign shocks make a negligible contribution when the model is estimated after shutting down technology diffusion. The results, more generally, show that it is not technology shocks, nor any other shock, but the transmission of shocks through the diffusion of new technologies that is the key driver of international business cycles.

A study on predictive analysis and rules for international financial risk considering debt crisis

Abstract This paper first establishes a system of international financial risk early warning indicators, constructs a VAR forecasting model for international financial risk, and uses the ADF test to identify the best amount of lags for the model before doing a smoothness test on the variables. The lagged values are used as independent variables to establish equations to describe the dynamic relationship between multiple variables. Then the model is tested for cointegration and Grange causality. The VAR model is then used to estimate the financial risk profile from the standpoint of a global economy and to examine the extent to which the debt crisis has affected international financial risk. The results show that at the 5% significant level, national debt expansion is the cause of asset price volatility, macroeconomic volatility, and debt risk. The forecasted inflation rate for 2023-2025 is 4.18, output gap is 4.94, and the policy interest rate is 4.18 for emerging Asian countries and regions.

Research on the Impact of Financial Innovation on Macroeconomic Volatility

Since the reform and opening up,China's economic and technological level has been significantly improved. For a long time, the Chinese economy has been in a stable and upward trend. With the arrival of the "Internet plus" era, the impact of innovation on economy and finance has risen to a new level. After the opening of the financial market, there was immediately what we are now familiar with financial risks and innovation, and financial innovation is aimed at reducing financial risks. According to the theory of economic cycle fluctuations, there are many factors that lead to macroeconomic fluctuations, including the total demand level such as consumption and investment, as well as the total supply level such as technological progress. With the continuous advancement of economic globalization, financial innovation, and financial integration, while financial markets bring economic profits, they inevitably bring systemic financial risks, which in turn affect the operation of the macro economy and seriously lead to financial crises. Only by mastering more economic operation information, having stronger judgment on future economic trends, and communicating more effectively with the market, can the efficiency of macroeconomic regulation be improved. This article studies the impact of financial innovation on macroeconomic fluctuations.

Volatility and Firm Growth: Do Firm Size and Age Matter?

The impact of different types of volatility on the growth of Pakistani-listed non-financial firms is examined by using annual unbalanced panel data over the period 1988–2017. The differential effects of volatility conditional on firm size and age are also explored. The results indicate that the influence of firm volatility on firm growth is positive for small firms and negative for medium, large, young, and mature firms. The impact of market volatility is positive (negative) for small, young, and mature (large) firms. Industrial volatility has a negative impact on mature firms’ growth, but the impact on young, small, medium, and large firms is positive. Finally, the results indicate that the impact of macroeconomic volatility is positive for small firms but negative for large, young, and mature firms.

Dynamicity and nonlinearity in the association between different facets of financial development and macroeconomic volatility: evidence from the World Economy

ABSTRACT This paper attempts to explore dynamicity and nonlinearity in the association between financial development and macroeconomic volatility, considering different aspects of financial development. The data to this end comprises a panel of 98 countries from 1991 to 2016. This paper uses an objective trichotomous development taxonomy to classify the countries according to their overall financial development and income. Dynamic panel regressions ensure that the role of overall financial development in smoothing macroeconomic volatility dwindles as the level of overall financial development increases. Overall financial development begins to amplify volatility after a certain point. Other aspects of financial development also affect volatility in a similar fashion. Nonlinear estimation results show that most of the measures of financial development are associated with macroeconomic volatility in a U-shaped manner. On the contrary, we find an inverted U-shaped association between financial institution efficiency and macroeconomic volatility. The findings are found to be robust to an alternative country classification system based on income and an alternative measure of volatility. To minimise macroeconomic volatility, policymakers should try to increase financial institution efficiency beyond its threshold point and keep all other aspects of financial development at their optimal level.

Financial Integration, Trade Integration and Economic Growth in the East African Community

This study sought to investigate the influence of macroeconomic volatility and trade integration on the relationship between financial integration and economic growth in the EAC member states. Specifically, the study aimed at determining the influence of trade integration on the relationship between financial integration and economic growth in the EAC. To achieve this objective, the following hypothesis was developed: There is no significant intervening effect of trade integration on the relationship between financial integration and economic growth. The study adopted a positivistic research philosophy and casual research design. Diagnostic tests were carried out to meet the requirements for conducting correlation and regression analysis on panel data. These include; Multicollinearity tests, Im- Pesaran-Shit Test (IPS) panel unit root test and Hausman test for fixed effects and random effects models. Descriptive statistics such as the mean, standard deviation, coefficient of variation as well as correlation analysis were conducted as the preliminary statistical analysis. Generalized-two stage least squares instrumental variable regression model (G2SLSIV) was then conducted to test the hypotheses. The findings of the study showed that: there is no significant intervening effect of trade integration on the relationship between financial integration and economic growth. These findings contribute to knowledge in the sense that, the positive and significant correlation between financial integration and economic growth confirms that, an increase in gross capital flows is accompanied by increase in economic growth. It also contributes to knowledge by revealing that, financial deepening contributes positively to financial integration which further contributes to accelerating economic growth. Therefore, the study is useful to the governments of respective member states in formulating policies aimed at achieving similarity in economic structures and ensuring the quality .....

Asset pricing with costly and delayed firm entry

AbstractSurvey evidence tells us that stock prices reflect the risks investors associate with long-run technological change. However, there is a shortage of models that can rationalize long-run risks. Unlike the previous literature assuming a fixed number of products, our model allows for new product varieties that appear in the form of new firms which face entry costs and delay in the entry process. The fixed variety model has a significant limitation in translating macroeconomic volatility into asset return volatility. Our model with growing varieties induces endogenous low-frequency fluctuations in productivity driving large, persistent variations in consumption growth and asset prices. It also changes the valuation of assets through the increase in the volatility of the pricing kernel (with a positive long-run component) and leads to higher excess returns. Our model is motivated by a simple recursively identified VAR model containing quarterly US data 1992Q3-2018Q4 with the following list of variables: total factor productivity, output, a measure of firm entry, and the excess return on stocks.

Does Tax Revenue Improve Economic Complexity in Africa?

This study assesses the effect of tax revenue on economic complexity in Africa using a sample of 29 African countries from 1995 to 2018. Applying the system generalized method of moments (GMM), we found that tax revenue spurs economic complexity in Africa by providing countries with critical financial resources to produce complex and sophisticated goods. We performed several robustness tests, including controlling for macroeconomic volatility and employing various measures of economic complexity and tax revenue, and the results remain robust. Furthermore, the mediation analysis results show that the effect of tax revenue on economic complexity is mediated by financial development and government spending. This study advocates for government strategies to enact tax reforms and maximize tax revenue mobilization, which will help finance economic complexity.

Limited Nominal Indexation of Optimal Financial Contracts

Abstract When financial contracts are not fully enforceable and firms observe their own nominal sales before the observation of the aggregate nominal price, the optimal financial contract is not fully indexed to inflation. Because of the limited nominal indexation, which is endogenous in the model, unanticipated inflation affects aggregate investment and future economic activity. The macroeconomic volatility induced by price uncertainty, however, is not monotone: It first increases and then decreases with nominal price uncertainty. We also show that the degree of nominal indexation declines with real idiosyncratic volatility and the impact of an inflation shock decreases with nominal indexation. Using firm-level data from Canada, we find that both predictions are supported by the data.

Monetary policy, macroeconomic uncertainty and corporate liquid asset demand: a firm-level analysis for India

PurposeThe study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.Design/methodology/approachThe authors analyze 5,640 firms for the period 2011–2021. The authors first estimate India’s monetary policy shocks by decomposing the exogenous shocks from the systematic component of monetary policy changes. The authors then examine the effects of the estimated monetary policy shocks and a range of macroeconomic and policy uncertainty indicators on companies’ cash and bank balances to asset ratios using two-step system generalized method of moments (GMM) estimators.FindingsThe authors find that monetary policy shocks cause the cross-sectional variances for the firms’ liquidity holdings to increase. In anticipation of macroeconomic volatility, companies respond to these shocks after taking into account all the firm-level information to minimize the opportunity costs of holding extra cash or too few cash balances that can hamper firms’ operations. Furthermore, compared to other shocks, the contribution of inflation-induced shocks is predicted to be the largest in the cross-sectional deviation of the firm’s cash holdings. The authors also find that low-growth, older and financially constrained firms observe lesser heterogeneity in their cash holdings as they tend to hold cash as a precautionary buffer.Originality/valueThe authors’ approach to the analysis is unique in many ways. To address potential transmission bias, the authors use nowcasts and forecasts of real gross domestic product (GDP) growth and inflation to generate a series of exogenous monetary policy shocks for identifying unanticipated changes in short-term interest rates. Subsequently, the authors estimate how these shocks affect the cross-sectional deviation of liquid assets. For estimating the effects of macroeconomic uncertainty on corporate cash demand, the authors utilize a range of proxies for uncertainty. Unlike previous attempts, the authors offer evidence for a developing and fast-emerging economy.

Macroeconomic volatility and the current account: Extending the evidence

Current account imbalances and macroeconomic volatility are two of the most pressing challenges in the global economy. Using an updated and extended data set, our contribution is to show that the relationship between the two is considerably more complex than hitherto thought and that it cannot be properly understood without allowing for country heterogeneity. In particular, over the full estimation period (1970–2020) or the pre-GFC period, increased volatility improves the current account in advanced, but not in developing, economies. Post-GFC, early evidence suggests that the relationship has been reversed, so that volatility is associated with improvements in the current account balance in developing, but not in advanced, economies. When we explore potential mechanisms for these asymmetries, we find that the biggest differences are in the behavior of exports and the real exchange rate.

Financial integration, productive development and fiscal policy space in developing countries

This paper offers a simple, tractable post-Keynesian model, which highlights the importance of structural change and productive development in defining the dynamics of the Real Exchange Rate (RER) and foreign debt in a small open developing economy. The argument is that in countries that keep the capital account open and rely on austerity policies to induce a notional surplus in the Balance of Payment, the RER can hardly be used as a tool aimed at smoothing the impacts of changes in international financial markets (as argued in the classical macroeconomic trilemma). In our model, capital flows and fluctuations in the RER endogenously feed back into each other and give rise to medium-term cyclical macroeconomic volatility. Fiscal austerity, supposedly taming external imbalances, exacerbates such instability. More diversified productive structures and stronger non-price competitiveness open more space for expansionary fiscal policies, make the economy more resilient to finance-led macroeconomic cycles and make external debt more sustainable. Capital controls, together with stronger price sensitivity of net exports, can further stabilize the economy. The paper carries important policy implications, in particular for the combination of industrial and macroprudential policies in peripheral economies, whose pattern of specialization is highly dependent on a few low-tech commodities. The adoption of industrial policies to foster non-price competitiveness and diversification is critical to sustaining macroeconomic stability, both in the short and the long run.

Exploring Effects of Firm, Industrial, Market and Macroeconomic Volatility on Firm Sales Growth under Heterogeneity in Pakistan

The impact of industrial, firm, macroeconomic and market volatility on growth of 457 non-financial firms listed at Pakistan Stock Exchange (PSX) is examined by using annual unbalanced panel data over the period 1988-2017. Further, we categorize firms into constrained and unconstrained firms based on Whited and Wu (2006) index. In addition, the differential effects of firm, industrial, market and macroeconomic volatilities are also explored for constrained and unconstrained firms. We find that constrained firms are positively affected by macroeconomic and firm level volatility and unconstrained firms are negatively affected by macroeconomic and firm level volatility. On the basis of the empirical findings, it is recommended that the decision makers should take into account the heterogeneity of firms (based on financial constraints) while making decisions. Finally, to achieve higher growth of the firms as well as the economic growth prudent and investor friendly policies should be designed.

Revisiting the effects of government size and labour market institutions on macroeconomic volatility: the case of the eurozone

We revisit the role of government size and labour market institutions on macroeconomic volatility, for the case of the eurozone since the adoption of the euro, which can provide a more homogeneous setting to test for macroeconomic volatility. The behaviour of the volatility of inflation looked rather different from that of GDP. Neither government size nor labour market institutions seemed to affect the volatility of GDP, except when demographic factors were included into the estimated equation; whereas lower volatility of inflation was related to a lower share of non-prime age workers and lower wage volatility.

Cross-sectional implications of dynamic asset pricing with stochastic volatility and ambiguity aversion

Building on recent research that highlights the importance of macroeconomic volatility and ambiguity aversion in explaining the dynamics of stock returns, in this paper we propose a dynamic asset pricing model that simultaneously accounts for stochastic macroeconomic volatility and ambiguity, assuming that investors deal with uncertainty about the mechanics of macroeconomic fluctuations using first-release consumption and revisions to aggregate consumption on vintage data. Our results show that the proposed model captures a large fraction of the cross-sectional variation of excess returns for a wide range of market anomaly portfolios. Furthermore, while the price of risk for ambiguity is positive and significant for the vast majority of assets under study, macroeconomic volatility yields ambiguous outcomes, although it significantly increases the explanatory power of the model for specific assets. Our results suggest that macroeconomic volatility and ambiguity complement each other in explaining the cross-sectional behavior of stock returns.

The effects of uncertainty shocks: Implications of wealth inequality

This paper investigates whether and how the effects of time-varying macroeconomic uncertainty depend on the distribution of wealth. I show that increases in wealth inequality amplify the responses to uncertainty shocks. Using deciles of the distribution of wealth along with a series of macroeconomic volatility for the United States, I find that consumption growth falls by approximately 0.25 percentage points more in response to a one standard deviation uncertainty shock when wealth inequality is high relative to when it is low. In order to understand the nonlinear effects of uncertainty on consumption growth, I consider a two-agent New Keynesian model. I calibrate this simple model to qualitatively match the empirical responses of consumption growth to a one standard deviation uncertainty shock and show that nominal rigidities are key to magnifying the effects of uncertainty under high wealth inequality.