Negative Supply Shocks Research Articles

Reconstruction Multipliers

Following the 2009 L'Aquila earthquake, financing of reconstruction by the Italian central government resulted in a sharp and unanticipated discontinuity in grants across municipalities that were ex-ante very similar. Using the emergency financing law as an instrument, we identify the causal effect of municipal government spending on local activity, controlling for the negative supply shock from the earthquake. In our estimates, this “reconstruction multiplier” is around unity, and we show that the grants provided public insurance. Economic activity contracted in municipalities that did not receive the grants, while it expanded -or at least did not contract- in municipalities that did receive them. Our results suggest several policy implications with respect to the allocation mechanism of such grants.

Reconstruction Multipliers

A law issued to allocate reconstruction grants following the 2009 "Aquilano" earthquake has resulted in a large and unanticipated discontinuity across municipalities with comparable damages. Using diff-in-diff analysis we estimate the "local spending" and the "local tax" multipliers - according to the composition of the stimulus - controlling for the negative supply shock generated by the event. The stimulus prevented a fall in economic activity and the multiplicative effects of tax cuts are estimated much higher than those of spending. Our results underline the importance of countercyclical fiscal interventions and suggest the most effective composition of such a stimulus.

Maximum Likelihood Estimation of the Standard Commodity Storage Model: Evidence from Sugar Prices

AbstractWe present a Maximum Likelihood estimator for the standard commodity storage model with stockouts, based on prices only. While it imposes no additional assumptions on the model, the Maximum Likelihood estimator has small sample properties superior to those of the Pseudo Maximum Likelihood approach. We provide a proof that is crucial for applying our estimator to the model with normal harvests and possibly unbounded prices, thereby eliminating an inconsistency in the empirical storage model literature. Applying our Maximum Likelihood estimator to a series of annual sugar prices from 1921 to 2009 provides new evidence for the empirical relevance of the standard storage model. Our results imply a cutoff price at which discretionary stocks go to zero, which is higher than the price obtained by applying the Pseudo Maximum Likelihood estimator to the same data. The implied frequency of stockouts is lower, and price correlations, skewness, and kurtosis implied by the model closely match those seen in the annual sugar price data. We find the price of sugar to be highly responsive to small changes in consumption. When inventories are not available to buffer the effects of negative supply shocks on consumption, prices must increase sharply to induce the consumption changes needed to clear the market. Our results show why production shocks are not necessarily aligned with price spikes; the same production shock can give rise to very different price responses, depending on whether or not there are sufficient stocks to buffer its impact.

Macroéconomie du court terme et politique climatique : quelques leçons d'un modèle d'offre et demande globales

We introduce the concept of carbon footprint into an aggregate demand and supply model with imperfectly competitive price and wage formation. We analyse the properties of the short-term macroeconomic equilibrium in the presence of a climate policy, which may take the form either of a carbon tax or of quotas of pollution permits. We show that in the short run climate policy (or its strengthening) is simultaneously a negative aggregate supply shock and a positive aggregate demand shock. It is thus inflationary but it has an ambiguous impact on aggregate economic activity and employment: it will only stimulate output in an economy where nominal wages are rigid enough. In all cases, climate policy will depress real wages. We also analyse the interactions between climate policy and the usual macroeconomic policies of demand (fiscal and monetary stimuli) and supply (labour tax cut). The multiplier effects of these demand and supply policies depend on the instrument chosen for implementing the climate policy (carbon tax or pollution permits). We finally establish the conditions under which a reform combining a climate policy strengthening and a labour tax cut can reach the double objective of a lower carbon footprint and a lower unemployment rate, without reducing workers’ real wages. Such a policy reform has however an ambiguous impact on the government surplus (or deficit).

Small and Medium Size Enterprises, Credit Supply Shocks, and Economic Recovery in Europe

The limited access to bank credit in recent years has increased the pressure on small and medium size enterprises (SMEs), forcing them to scale down investment plans and production. This paper, which explores the macroeconomic implications of this channel, finds evidence that countries with high prevalence of SMEs tended to recover more slowly from the global financial crisis than their peers, implying that the interaction of the economic structure and access to bank financing plays a critical role in episodes of economic recovery. This conclusion is reinforced by a VAR estimation, which demonstrates that a negative credit supply shock applied to SMEs has an adverse effect on economic activity, and this impact is amplified in countries that have a high share of SMEs.

Small and Medium Size Enterprises, Credit Supply Shocks, and Economic Recovery in Europe

The limited access to bank credit in recent years has increased the pressure on small and medium size enterprises (SMEs), forcing them to scale down investment plans and production. This paper, which explores the macroeconomic implications of this channel, finds evidence that countries with high prevalence of SMEs tended to recover more slowly from the global financial crisis than their peers, implying that the interaction of the economic structure and access to bank financing plays a critical role in episodes of economic recovery. This conclusion is reinforced by a VAR estimation, which demonstrates that a negative credit supply shock applied to SMEs has an adverse effect on economic activity, and this impact is amplified in countries that have a high share of SMEs.

Returning to the Nest: Debt and Parental Co-Residence Among Young Adults

A law issued to allocate reconstruction grants following the 2009 "Aquilano" earthquake has resulted in a large and unanticipated discontinuity across municipalities with comparable damages. Using diff-in-diff analysis we estimate the "local spending" and the "local tax" multipliers - according to the composition of the stimulus - controlling for the negative supply shock generated by the event. The stimulus prevented a fall in economic activity and the multiplicative effects of tax cuts are estimated much higher than those of spending. Our results underline the importance of countercyclical fiscal interventions and suggest the most effective composition of such a stimulus.

The Impact of Borrowing Diversity on Financial and Real Decisions in a Company

Does borrowing diversity (i.e., borrowing via a larger number of debt types) affect how firms respond to an exogenous credit supply shock? To answer this question I use the recent 2007-2009 credit crisis as a negative exogenous credit supply shock to U.S. non-financial companies. Applying a difference-in-differences methodology, I find that during the crisis companies that ex ante borrowed from many debt types had significantly higher capital expenditures than otherwise similar companies that borrowed from fewer debt types. The former group also had higher market valuations, a lower cost of debt, a lower reduction in debt issuance, higher leverage ratios, and a lower need to use internal cash during the crisis. This evidence is robust to applying an instrumental variable estimation, which takes into account the endogenous nature of the diversity measure. Finally, further tests suggest that borrowing diversity could represent a valid measure for financial constraints.

Equity Returns and the Business Cycle: the Role of Supply and Demand Shocks

The equity premium in the UK has risen significantly since the start of the financial crisis and the associated extended recession. This paper examines the relationship between the business cycle and equity returns to see how robust this association is. Using official business cycle dating and identified structural macroeconomic shocks, evidence is found for counter‐cyclicality in excess returns. Negative supply shocks are found to have an especially large and significant counter‐cyclical impact. A long sample of realized returns using revised data and a sample of expected returns using real‐time data show similar results suggesting similarity in realized and expected returns.

SUPPLY‐SIDE RESPONSE TO DECLINING HEROIN PURITY: FENTANYL OVERDOSE EPISODE IN NEW JERSEY

The inelastic price demand observations characteristic of illegal drug markets have led to the conclusion that the burden of a negative supply shock would be completely reflected to consumers. This paper argues that the increasing availability of prescription opioids may threaten heroin sellers' profit margin and force them to find alternative methods to compensate buyers in the event of a supply shock. We investigate the 2006 fentanyl overdose episode in New Jersey and argue that the introduction of non-pharmaceutical fentanyl, its spatial distribution, and the timing of overdose deaths may have been related to trends in heroin purity. Using medical examiner data, as well as data from the Drug Enforcement Administration, Office of Diversion Control on retail sales of prescription opioids in a negative binomial specification, we show that month-to-month fluctuations in heroin purity have a significant effect on fentanyl-related overdoses, particularly in those areas where prescription opioids are highly available.

Equity Returns and the Business Cycle: The Role of Supply and Demand Shocks

The equity premium in the UK appears to have risen significantly since the start of the financial crisis and the associated extended recession. This paper examines the relationship between the business cycle and equity market returns to see how robust this association is. Several classifications of UK business cycle quarters are examined and related to the returns from an investment strategy which buys the market one or more quarters after a business cycle quarter and holds it for one year. Official business cycle dating methods as well as identified structural macroeconomic shocks are examined. The findings are that there is clear evidence for counter-cyclicality in excess returns. Returns are significantly higher in the year following a recession rather than an expansion quarter. There is also a significant difference in the pattern of returns if the downturn in the quarter is the result of a supply or demand shock. Negative supply shocks are found to have an especially large and significant counter cyclical impact on returns. This paper analyses a long period of UK data for determining realised returns using revised data as well as expected returns using a shorter dataset of real-time data. The paper finds similar results for the two datasets suggesting that realsied and expected returns may not be so different from one another. The paper also assesses the ability of the models to forecast outside of their sample period.

Sit down at the ball game: How trade barriers make the world less food secure

This paper analyses the impacts of trade policy responses to rising world food prices by carrying out a series of stylised experiments in the wheat market using a world trade model, GTAP. The sequence of events that is modelled comprises a negative wheat supply shock and subsequent implementation of an export tax by a major net exporter and a reduction in import tariffs by a small importer. The effects of trade policy responses are contrasted with those of full liberalisation of the wheat market. At the core are the (opposite) effects on producers and consumers, as well as the terms of-trade and trade tax revenue effects. Food security is shown to depend crucially on changes in prices but also in incomes that are associated with changes in factor returns. The results reveal that major net exporters are generally better off when implementing export taxes for food security purposes. Large exporting countries export price instability causing world food prices to rise further. Net importing countries lose out and have limited leeway to reduce tariffs or subsidise imports. Liberalising wheat trade mitigates rising prices and contributes to food security, but to the detriment of production in Africa and Asia, making them more dependent on and vulnerable to changes in the world market. Concerted action at the WTO forum is required, notably clarifying and sharpening the rules regarding export measures.

Euro Area and Global Oil Shocks: An Empirical Model-Based Analysis

We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver of higher oil prices is an increase in the rest of the world's aggregate demand, both euro-area GDP and CPI inflation increase, whereas negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro-area economy. Moreover, the increase in oil prices during the 2004-2008 period did not induce stagflationary effects on the euro-area economy because it was associated with positive aggregate demand shocks in the rest of the world. Similarly, a drop in world aggregate demand helps to explain the recent (2008) simultaneous drop in oil prices, euro-area GDP and inflation - particularly its fuel component.

Agriculture and Trade Opportunities for Tanzania: Past Volatility and Future Climate Change

AbstractGiven global heterogeneity in climate‐induced agricultural variability, Tanzania has the potential to substantially increase its maize exports to other countries. If global maize production is lower than usual owing to supply shocks in major exporting regions, Tanzania may be able to export more maize at higher prices, even if it also experiences below‐trend productivity. Diverse destinations for exports can allow for enhanced trading opportunities when negative supply shocks affect the partners' usual import sources. Future climate predictions suggest that some of Tanzania's trading partners will experience severe dry conditions that may reduce agricultural production in years when Tanzania is only mildly affected. Tanzania could thus export grain to countries as climate change increases the likelihood of severe precipitation deficits in other countries while simultaneously decreasing the likelihood of severe precipitation deficits in Tanzania. Trade restrictions, like export bans, prevent Tanzania from taking advantage of these opportunities, foregoing significant economic benefits.

Wage Theory, New Deal Labor Policy, and the Great Depression: Were Government and Unions to Blame?

A growing number of economists blame the length and severity of the Great Depression on factors that rigidified wage rates, raised production costs, and interfered with the market allocation of labor. The target of their critique is President Franklin Roosevelt's New Deal labor program, which they portray as creating a series of large negative supply shocks through encouragement of unions, minimum wages, unemployment insurance, and other anticompetitive industrial relations practices. The author uses a combination of institutiognal and Keynesian theory to present the other side of the story. Drawing principally from the works of J. R. Commons and J. M. Keynes, he develops both a spending and a productivity rationale for stable wages during the Great Depression and demonstrates that the New Deal's interventionist labor program was on balance necessary and beneficial. He also highlights the neglected macro-economic dimension of industrial relations theory and policy.

Long-term debt maturity and financing constraints of SMEs during the Global Financial Crisis

We use the recent financial crisis to investigate financing constraints of private small and medium-sized enterprises (SMEs) in Belgium. We hypothesize that SMEs with a large proportion of long-term debt maturing at the start of the crisis had difficulties to renew their loans due to the negative credit supply shock, and hence could invest less. We find a substantial variation in the maturity structure of long-term debt. Firms which at the start of the crisis had a larger part of their long-term debt maturing within the next year experienced a significantly larger drop in investments in 2009. This effect is driven by firms which are ex ante more likely to be financially constrained. Consistent with a causal effect of a credit supply shock to corporate investments, we find no effect in “placebo” periods without a negative credit supply shock.

Is there any Link Between Commodity Price and Monetary Policy? Evidence from Australia

The aim of this paper is to examine whether the commodity prices predict inflation, unemployment and short term interest rate in Australia. Advanced time series econometric modeling such as vector autoregressive model, cointegration and granger causality are used for this purpose. The empirical results show that three commodity prices (COMRL, COMNRL and COMBSMTL) precede inflation. However, no evidence of reverse causation is found. These findings have important implication for monetary authority. Inflation targeting experience has so far been hit by positive supply shocks. In case of negative supply shock, commodity price may be useful in singling out the likely direction of inflation.

Sit Down at the Ballgame: How Trade Barriers Make the World Less Food Secure

This paper analyses the impacts of trade policy responses to rising world food prices by carrying out a series of stylised experiments in the wheat market using a world trade model, GTAP. The sequence of events that is modelled comprises a negative wheat supply shock and subsequent implementation of an export tax by a major net exporter and a reduction in import tariffs by a small importer. The effects of trade policy responses are contrasted with those of full liberalisation of the wheat market. At the core are the (opposite) effects on producers and consumers, as well as the terms-of-trade and trade tax revenue effects. Food security is shown to depend crucially on changes in prices but also in incomes that are associated with changes in factor returns. The results reveal that major net exporters are generally better off when implementing export taxes for food security purposes. Large exporting countries export price instability causing world food prices to rise further. Net importing countries lose out and have limited leeway to reduce tariffs or subsidise imports. Liberalising wheat trade mitigates rising prices and contributes to food security, but to the detriment of production in Africa and Asia, making them more dependent on and vulnerable to changes in the world market. Concerted action at the WTO forum is required, notably clarifying and sharpening the rules regarding export measures.

How Do Credit Supply Shocks Propagate Internationally? A Gvar Approach

We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a flight to quality to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample.

Cyclical effects of bank capital requirements with imperfect credit markets

This paper analyzes the cyclical effects of bank capital requirements in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on collateral. Basel I- and Basel II-type regulatory regimes are defined and a capital channel is introduced through a signaling effect of capital buffers. The macroeconomic effects of a negative supply shock are analyzed, under both binding and nonbinding capital requirements. Factors affecting the procyclicality of each regime (defined in terms of the behavior of the risk premium) are also identified.