Negative Supply Shocks Research Articles

Weather-related disasters and inflation in the euro area

This article investigates the impact of weather-related disasters on inflation in the euro area over the period 1996–2021. Using a panel structural vector autoregression approach, we explore whether weather-related disasters have a significant and persistent effect on inflation, as well as the role that demand-side and supply-side channels play as drivers of inflation. We also analyse the heterogeneous effects of inflation on different product categories. Our results suggest that weather-related disasters have a positive, non-persistent effect on inflation. This reflects the prevalence of negative supply shock channels and positive demand shock channels over negative demand shock channels. We also find that weather-related disasters have more pronounced effects on the inflation of product categories that represent a higher proportion of the spending of low-income households, implying that disasters reinforce inflation inequality. Overall, our results suggest that, as the climate crisis deepens, it might become increasingly challenging for the European Central Bank to control inflation and its inequality effects.

The dynamic effects of oil supply shock on China: Evidence from the TVP-Proxy-VAR approach

This study examines how changes in oil supply impact oil prices and China's macroeconomy. We developed an estimator that uses OPEC's institutional characteristics and high-frequency data to identify an oil supply surprise shock. This oil supply surprise is then incorporated as an exogenous variable into a TVP Proxy VAR model to analyze the effects of oil supply shocks on China's economy. Our findings indicate that negative oil supply shocks lead to higher oil prices, which in turn cause increases in China's interest rates and inflation, a decline in stock prices, a short-term rise in exports, and a long-term decrease in industrial output. When considering time-varying model parameters, we found that periods with larger oil supply shocks have a more pronounced impact on the macroeconomy. Our research provides empirical evidence for a better understanding of the effects of energy supply fluctuations.

Wages and Employment in the Netherlands, 2017–2023

This research documents changes in employment and wages in the Netherlands for different types of workers. We compare 2017 to 2023 using regression-adjusted wages to make sure changes in composition of the workforce do not influence our estimates. The research period has been characterised by high labour demand, negative supply shocks, high levels of inflation and economic lockdowns, all of which have contributed to substantial labour-market dynamics. Our findings suggest that employment has been growing by 2 percent in the period 2017–2023, of which 1.8 percent has been due to additional workers finding employment. Women have experienced the largest increase in employment, while the employment of men on temporary contracts has slightly fallen. Wages have been rising for workers at the bottom of the wage distribution. From the median of the wage distribution onwards real gross hourly wages have been fallen. The most likely explanation for rising wages at the bottom is the stepwise increase in minimum wages enforced by new labour-market legislation.

The Vagaries of the Sea: Evidence on the Real Effects of Money from Maritime Disasters in the Spanish Empire

Abstract We estimate the effect of money supply changes on the real economy by exploiting a recurring natural experiment: maritime disasters in the Spanish Empire (1531–1810) that resulted in the loss of substantial amounts of silver money. We find that negative money supply shocks caused Spanish real output to decline. A transmission channel analysis highlights slow price adjustments and credit frictions as mechanisms through which money supply changes affected the real economy. Especially large output declines occurred in textile manufacturing against the backdrop of a credit crunch that impaired merchants’ ability to supply their manufacturers with inputs.

Business cycles and healthcare employment.

Is healthcare employment recession-proof? We examine the long-standing hypothesis that healthcare employment is stable across the business cycle. We explicitly distinguish between negative aggregate demand and supply shocks in studying how healthcare employment responds to recessions, and show that this response depends largely on the type of the exogenous shock triggering the recession. First, aggregate healthcare employment responds procyclically during demand-induced recessions but remains stable during supply-induced recessions. Second, healthcare utilization drops significantly during demand-induced recessions, explaining the decline in healthcare employment during these periods. Finally, there is significant heterogeneity in the employment responses of the healthcare sub-sectors. While healthcare employment in most sub-sectors responds procyclically during recessions caused by both negative demand and supply shocks, it responds countercyclically in nursing-dominant sectors. Importantly, by isolating the recessionary impact of negative aggregate demand shocks from supply shocks on healthcare employment, we provide new empirical evidence that healthcare employment, in general, is not recession-proof.

Stuck in traffic: Measuring congestion externalities with negative supply shocks

Congestion is one of the most challenging issues of urban agglomeration. Congestion costs are higher than socially optimal levels, and more information is needed about the key parameters required to design optimal policies. This paper exploits an exogenous reduction in for-hire vehicle supply in New York City to estimate their effect on travel speed and document substitution patterns to other transportation modes. A 9.1 percent decrease in taxis is associated with increased travel speed by 0.45 min per mile, a 7.2 percent increase. Consumer surplus gains from increased speed fade as waiting times increase and people switch to other transportation modes.

Ökonomische Folgen: Was Kriege die Welt kosten

Abstract Amid escalating geopolitical tensions, we offers insights into the far-reaching consequences of wars. Based on a new dataset on major conflicts since 1870, the findings show that wars cause a substantial decline in GDP and spike in inflation within war zones. Interestingly, countries geographically close to war zones experience significant economic disruptions, even when neutral to the conflict, whereas countries far from the conflict may see minimal to slightly positive spillovers. The study demonstrates how wars represent a massive negative supply shock, with geographical proximity and trade integration explaining the varying effects on different countries.

An index of static resilience in interindustry economics

We introduce a novel static indicator of economy-wide resilience that assesses an economy’s ability to adapt and recover from negative shocks originating from either the demand or supply side. This metric is counterfactual and, through simulation, reveals the extent of adjustments required to maintain total income at or above the initial pre-shock level while preserving the initial economic structure. The larger the scale of adjustments needed in response to the shock, the lower the resilience of the economic system. The methodology we propose for this assessment relies on the concept of constrained input–output multipliers embedded within a linear programming problem. We demonstrate the applicability of our approach by calculating and comparing demand and supply resilience indices for a group of ten large OECD economies. In all these economies, the results indicate that manufacturing industries exhibit higher resilience to demand shocks than service sectors and that economic resilience regarding negative supply shocks is higher than that of demand shocks.

Effect of Federal Funds Rate on CPI and PPI

One of the crucial jobs of central banks is to rein in inflation as it creates uncertainty in the economy and in private investment and ultimately negatively impacts the economy. If the source of inflation is positive demand shock, then raising the federal funds rate target is the right way to rein in inflation. If the source of inflation is negative supply shock, then raising the federal funds rate target will make things worse. In this study, the impact of FFR (federal funds rate) on CPI (consumer price index) and producer price index (PPI) is examined. Findings indicate that raising the federal funds rate will have a negative impact on both CPI and PPI with a 2-period lag. The possible explanation of this finding is that raising federal funds rate lowers aggregate demand, lowers the price level and thereby the CPI. And when CPI falls, it lowers per-unit profit, prompting producers to cut supply, which in turn lowers the demand for producer goods and services, and thereby lowers PPI.

Trust and monetary policy

AbstractWe analyze how trust affects the transmission of negative demand and supply shocks using a behavioral macroeconomic model. We define trust to have two dimensions: trust in the central bank's inflation target and trust in the central bank's capacity to stabilize the business cycle. We find, first, that when large negative shocks occur, the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories, trust collapses, and in the good trajectories, it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions, in particular the initial state of inflation and output expectations, matter. Unfavorable initial expectations drive the economy into a bad trajectory, and favorable initial expectations produce good trajectories. Fourth, we analyze the sensitivity of our results with respect to the size of the shocks. Fifth, we derive implications of our results for our capacity of making forecasts about the effects of large demand and supply shocks.

Asymmetric impact of oil price shocks on inflation: Evidence from quantile-on-quantile regression

In this paper, we explore the asymmetric impact of different oil price shocks on inflation after decomposing the shocks into supply shocks, demand shocks, and risk shocks. Using the quantile-on-quantile regression (QQR) approach, we reveal that when inflation is positive, oil supply shocks have a negative impact on inflation, and demand shocks affect it asymmetrically. Positive demand shocks have a positive effect on inflation, while negative demand shocks affect inflation negatively. In a deflationary environment, positive supply shocks and negative demand shocks do not have a significant impact on inflation, while negative supply shocks and positive demand shocks are conducive to alleviating deflation. The risk shocks affect inflation insignificantly in most of the periods. Only when the risk shocks are dramatically high, they will negatively affect inflation which is in a positive situation. However, the risk shocks no longer affect inflation significantly when inflation is also extremely high. Our conclusions are robust after being compared with the results of the quantile regression approach. We finally explore the time-varying characteristic of impact, finding that the influence of shocks is relatively higher during the major supply, demand, and risk shock events than in other periods.

Immigration enforcement and the institutionalization of elderly Americans

This paper examines the relationship between immigration enforcement and institutionalization rates of the elderly. Exploiting the staggered implementation of the Secure Communities (SC) immigration enforcement program across U.S. counties from 2008 through 2014, we show that SC led to a 0.26 percentage points (6.8 percent) increase in the likelihood that Americans aged 65 and above live in an institution. Supportive of supply shocks in the household services market as a central mechanism, we find that the elderly who are most likely to purchase domestic worker services are also the most likely to move into nursing homes following the implementation of SC. Additionally, we find suggestive evidence of significant reductions in the work hours of housekeepers, personal care aides, and home health workers hinting at the critical role of negative supply shocks in occupations that facilitate aging in community.

Pandemic and invasion related inflation in the selected European Union countries

The invasion of Russia in Ukraine brought not only the suffering of the Ukrainian people, but also an unprecedented rise in price levels in Europe. Moreover, the European Union countries underwent a series of negative supply shocks caused by pandemic-induced supply chain disruptions and the invasion-induced energy crisis. Through the available data on inflation, the harmonized index of consumer prices and other variables related to it, we analyse the growth of the price level in the EU countries. In this contribution we focus on the first year of the invasion. The methodological tool is cluster analysis in SPSS, as we use the dendrograms and graphs to find out in which countries the supply chain disruptions, the war in Ukraine and consequent energy crisis have a significant impact in increasing price levels in the EU in 2022. These are countries more energy dependent on Russian suppliers of oil or natural gas.

Why Did Housing Prices Rise to a Record Level in Turkey? An Empirical Analysis

Abstract Turkey is one of those countries where housing market has been most severely affected by COVID-19 pandemic. Today the effects of the outbreak have been eliminated significantly. This study retrospectively looks at the days when the world faced a widespread outbreak of a pandemic and investigates the effect of the pandemic and the changes in consumer confidence on housing prices and the volatility of housing prices. Considering the structural breaks in the analysis period (2010:q1-2022:q4 quarterly), we used the Lee and Strazicich structural break unit root test as a research method. The results show that an increase in costs due to a break in the supply chain and containment measures forcing the workforce to stay at home affected the housing supply adversely. It is observable that expansionary economic policies and social assistance programs have a positive effect on housing demand. In this regard, negative supply shock and positive demand pressure are seen to be the determinants of the recent housing price increases in Turkey. However, while there is a positive relationship between consumer confidence and house prices, the effect of house prices on the volatility is statistically insignificant.

Electoral Violence and Supply Chain Disruptions in Kenya's Floriculture Industry

Abstract Violent conflicts, particularly at election times in Africa, are a common cause of instability and economic disruption. This paper studies how firms react to electoral violence using the case of Kenyan flower exporters during the 2008 postelection violence as an example. The violence induced a large negative supply shock that reduced exports primarily through workers' absence and had heterogeneous effects: larger firms and those with direct contractual relationships in export markets suffered smaller production and loss of workers. On the demand side, global buyers were not able to shift sourcing to Kenyan exporters located in areas not directly affected by the violence or to neighboring Ethiopian suppliers. Consistent with difficulties in ensuring against supply-chain risk disruptions caused by electoral violence, firms in direct contractual relationships ramp up shipments just before the subsequent 2013 presidential election to mitigate risk.

A simple model of panic buying

We study a simple dynamic model to rationalize episodes of excess demand that resemble “panic buying” episodes in actual markets. In such episodes, consumers compete for a scarce good. Scarcity is triggered by an anticipated negative supply shock that takes place in a future period with positive probability. To avoid the risk of non-consumption, consumers can stockpile the good in earlier periods. We demonstrate that these stockpiling decisions can reinforce each other, creating a cascade of excess demand in several periods similar to “panic buying” episodes observed, for instance, during the Corona crisis. In our model, stockpiling is always detrimental to welfare, and we develop a suitable policy response.

Credit supply shocks, home purchase volume, and borrowing behavior

AbstractWe exploit the 2007 private label securitization (PLS) freeze as a quasi‐experiment to study the impact of a negative credit supply shock on home purchases and borrowing behavior. Using a difference‐in‐differences estimator, we show that a negative supply shock to first‐lien mortgages has little impact on the volume of purchases financed with a mortgage, but significantly reduces the average first‐lien loan balance. Much of this reduction in loan balances is the result of increased bunching at the conforming loan limit that is achieved through a combination of greater second mortgage utilization and larger downpayments. Importantly, we find significant heterogeneity in the response to the mortgage supply shock across borrower characteristics and house price levels. Home purchase volume does decline after the shock for less creditworthy borrowers and in expensive locations. The reduction in first‐lien balances is fairly uniform across borrower types, however, the effect is slightly more acute in less expensive areas. Our results suggest that financial market frictions (e.g., downpayment constraints, imperfect credit) play an important role in determining how credit supply shocks impact housing purchases and borrowing behavior.

MACROECONOMIC EFFECTS OF GLOBAL UNCERTAINTY IN THE TURKISH ECONOMY

Purpose- In this study, it is aimed to investigate the effects of global uncertainty shocks on the macroeconomic variables of the Turkish economy. Methodology- In the study, the global world uncertainty index (WUI) constructed by Ahir et al. (2022) is used as an indicator of global uncertainty. A structural auto regressive (SVAR) model is established, which includes five variables (global uncertainty indicator, economic growth rate, inflation rate, unemployment rate, and interest rate). In addition, three real variables representing economic activity (real consumption, real investment and real bank loans) are substituted for unemployment rate in the model, respectively. The data set covers the period 2003Q1-2020Q1. Findings- According to the findings of impulse response and variance decomposition analyses, real GDP growth, real consumption growth, real investment growth and real credit growth react negatively and significantly to an increase in global uncertainty. On the other hand, inflation rate, unemployment rate and interest rate respond positively and significantly to an increase in global uncertainty. These results prove that a global uncertainty shock creates the similar effects of a negative supply shock on the Turkish economy. In addition, the robustness of the findings is checked using the global economic policy uncertainty (GEPU) index developed by Baker et al. (2016). Conclusion- In the light of these findings, it can be suggested that the negative effects of global uncertainty shocks on domestic macroeconomic indicators should be mitigated through monetary and fiscal policies. Keywords: Global uncertainty, structural VAR, economic growth, inflation, unemployment JEL Codes: C32, E30, F40

The impact of supply chain disruptions on business expectations during the pandemic

Utilizing the Federal Reserve Bank of Atlanta’s Business Inflation Expectations (BIE) survey, which has been continuously collecting subjective probability distributions over own-firm future unit costs since October 2011, we document two facts about firms’ marginal cost expectations and risk during the COVID-19 pandemic. First, in the early months of the pandemic, firms, on net, saw COVID-19 largely as a demand shock and lowered their one-year ahead expectations. However, as the pandemic wore on, firms’ one-year ahead unit cost expectations rose sharply alongside their views on supply chain and operating capacity disruptions. Second, the balance of unit cost risks shifted sharply over the course of the pandemic and by the end of 2022, upside risks had sharply outweighed perceived downside risks over the year ahead. We find that both positive demand shocks (e.g. large order backlogs) and negative supply shocks (e.g. long supplier delivery times and labor shortages) have contributed to elevated short-term unit cost expectations and risk. Specifically, supply shocks accounted for roughly 40% of the increase in manufacturers’ and nearly one-third of service-providers’ unit cost expectations.

Early warning of exchange rate risk based on structural shocks in international oil prices using the LSTM neural network model

The Russia–Ukraine conflict has caused an external shock to the oil market as the exchange rate risk increased with significant depreciation of major currencies relative to the U.S. dollar (USD). In this paper, structural shocks to oil prices calculated by the Ready (2018) method are introduced in addition to traditional exchange rate predictor variables such as oil prices. Utilising a long short-term memory neural network model, we verify the early warning effect of structural shocks to international oil prices on exchange rate risk in the context of the Russia–Ukraine geo-conflict. We have several empirical findings. First, the variance decomposition method indicates that oil price shocks affect the euro-dollar exchange rate risk. After the conflict between Russia and Ukraine, the euro exchange rate risk continued to rise significantly, mainly affected by supply shocks. Second, compared with traditional prediction models, the LSTM neural network model has a higher prediction accuracy, which is conducive to improving the early warning performance of exchange rate risks and maintaining the stability of the foreign exchange market. Third, the introduction of oil price shock can fully extract and use the information from oil price changes, which significantly improves the learning performance of the oil price early warning model of exchange rate risk. Fourth, the introduction of oil price risk shocks in the whole sample, the introduction of oil price demand shocks before the Russia-Ukraine conflict, and the introduction of oil price supply shocks, especially negative supply shocks, after the conflict between Russia and Ukraine, can warn exchange rate risks more effectively. This study proposes a new method for early warning of exchange rate risk that can help cross-border enterprises and government policymakers to respond to unexpected events and effectively mitigate associated risks.