Output Contraction Research Articles

A Measurement of Aggregate Trade Restrictions and Their Economic Effects

Abstract This study develops a new Measure of Aggregate Trade Restrictions (MATR) using data from the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions. MATR is a measure of direct and indirect official government policy related to the international flow of goods and services. MATR is simple, plausible, quantitative, easily updated, based on relevant measures of trade policy and other international restrictions affecting trade (e.g., payment restrictions), and covers an unbalanced sample of up to 157 countries from 1949 to 2019. MATR is strongly correlated with, and—importantly—more comprehensive, in terms of country and time coverage, than existing measures of de jure openness; it is also granular. As such, MATR empowers empirical analysis to increase coverage in research related to trade restrictions and other trade-related openness policies. MATR is used in the study to show that direct and indirect restrictions to trade are associated with significant contractions in output.

Fiscal spillover in emerging economies: Real versus financial channels

Fiscal policy is an important tool for business cycle stabilization and has significant spillover through real and financial channels. This paper estimates the spillover of US fiscal policy shock in emerging economies which is distinct from US monetary policy spillover. We find that - similar to its effect in advanced economies as documented in the literature - the shock lowers both the nominal and real policy rates in emerging economies. Results suggest a disconnect between long-term and policy rates that leads to the steepening of the yield curve in emerging economies in the medium term due to the shock. Most of these effects of US government expenditure shock on the policy rate and the yield curve in emerging economies are direct effects (financial channel) and not indirectly driven by the effect of this shock on GDP growth and inflation (real channel). Contrary to its effect in the US, we find that this shock leads to a prolonged appreciation of real effective exchange rates in emerging economies, hurts their external competitiveness, and leads to a contraction in output in emerging economies. As expected, countries having higher exports and trade-to-GDP ratio experience a bigger decline in output.

General Equilibrium Model for Monetary Policy Responses to Macroeconomic Instabilities in Developing Economy: A Ghanaian Perspective

The study develops a standard New Keynesian model to examine how monetary authority reacts to both domestic and external shocks as well as how its policy decision impacts the general macroeconomy in developing African economy. Using Bayesian estimation techniques and a Ghanaian dataset, the article also seeks to determine the best-suited monetary policy rule for Ghana and countries with similar characteristics. The basic finding is that a forward-looking Taylor rule—where authority reacts to one-period-ahead inflation deviation from target alongside the current output gap—is the most appropriate monetary policy rule for Ghana. Another salient finding is that variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. In addition, the dominant determinants of inflation are exchange rate risk premium and price markup shocks. Collectively, the article also unveils that monetary policy responses to macroeconomic shocks are broadly in line with conventional economic theory. There is also conspicuous evidence that the general equilibrium model with representative consumers is practically suitable for monetary policy analysis in Ghana, as contractionary monetary policy impulse is able to contemporaneously induce disinflation and output contraction. Given the strong evidence of a large segment of the unbanked population in Ghana, the findings in this study could be verified based on a model that allows for the co-existence of optimizing and non-optimizing consumers. JEL Classification: B41, C5, C11, D11, D21, D41, D42, E2, E12, E43, E52, E58, F31, F41

Environmental Policies in a Polluting Duopoly: A Simple Comparison

AbstractIn a polluting Cournot duopoly with homogeneous goods, this work compares the environmental, public finance and welfare impacts of three policies: an emissions tax, an abatement subsidy, and a policy mix. A subsidy, alone or coupled with a tax, always increases abatement; however, taxation disincentivises production, leading to decreased environmental damage, which positively affects welfare. Except for a rather inefficient technology, the emissions tax produces the lowest environmental damage; this positive effect, jointly with the tax revenues the government collects, more than offsets the negative impact on profits and consumer surplus due to output contraction, leading to the highest welfare. Only when societal awareness is negligible and technology is inefficient does the government design a policy providing a subsidy.

Skill Shifts and Retraining Initiatives: Adapting to Post-Pandemic Labor Market Dynamics

This paper thoroughly explores the intricate dynamics of the Chinese labor market in the aftermath of the COVID-19 pandemic, examining consequential shifts in skills and the retraining initiatives undertaken to navigate this evolving landscape. A comprehensive analysis explores the broader economic ramifications of the pandemic, including contractions in economic output and disruptions in global supply chains. Emphasis is placed on changes in employment rates, reflecting both the initial surge in unemployment and subsequent recovery with altered employment patterns. The study scrutinizes industry disruptions, particularly the accelerated adoption of technology, and evaluates macroeconomic factors, such as government stimulus measures and evolving labor market policies. The importance of ongoing research and adaptive policies is emphasized to address the evolving skill requirements in the post-pandemic Chinese labor market.

Forbearance versus Foreclosure in a General Equilibrium Model

AbstractIn a business cycle model with endogenous firms' dynamics and debt renegotiation, we show that during financial crises loan forbearance does not harm the economy unless banks imperfectly monitor loans, and loan opacity worsens banks' moral hazard problem. Aggressive interest rate reductions and quantitative easing limit defaults and financial crisis‐induced output contractions without hampering the entry of new firm entries. The decline in the natural interest rate, due to slower productivity growth and persistent liquidity shocks, potentially explains the observed long‐term trend in nonperforming loan shares.

Sectoral implications of policy induced household credit expansions

This paper analyses the sectoral implications of household credit expansions in a two-sector open economy model. In the model, policy-induced expansion in banks’ willingness and ability to lend to households results in new lending, boosting aggregate demand and average wages in the nontradable sector. Under fixed relative wages and mark-up pricing in the tradable sector, wage pressures translate into inflationary pressures. The inflation-targeting central bank increases the policy rate to contain inflationary pressures. This intervention causes a real exchange rate appreciation, followed by a reduction in international competitiveness and a contraction of the tradable sector output. This way, the model illustrates that consumer credit expansions can trigger premature deindustrialisation, shifting the sectoral structure away from the high-productivity tradable sector towards the lower-productivity nontradable sector. Key macroeconomic developments from the Turkish economy between 2002 and 2013 are presented to motivate the model.

Drivers of large recessions and monetary policy responses

Shocks to capital utilization are introduced in a structural macroeconomic model with financial frictions. Estimates for the Euro Area and the United States show that these shocks were among the most important drivers of the output contraction during the Global Financial Crisis and the COVID-19 Crisis, while financial shocks were more relevant during the Global Financial Crisis. Thanks to the timely and strong intervention of the European Central Bank and the U.S. Federal Reserve, monetary policy shocks had a sizable positive contribution on output and inflation during, and in the aftermath of, the COVID-19 Crisis.

Efficacy of Fiscal Policy in Stimulating Economic Growth During Recession in China

Fiscal policy involves decisions related to government expenditures on public goods and services, as well as the collection of revenue through taxes and other sources. The government can use fiscal policies to adjust its spending and taxation levels to stimulate or restrain economic activity, influence consumer and business behavior, and achieve desired macroeconomic outcomes. A recession is characterized by a contraction in output, income, employment, and trade, usually accompanied by a general decline in business activity and a decline in consumer spending. During recessions, when economic activity declines, policymakers often turn to fiscal policy as a tool to boost aggregate demand, create jobs, and promote recovery. The study noted that China has experienced various economic downturns and has implemented fiscal policies to address them. Like during the global financial crisis in 2008-2009, China implemented a massive fiscal stimulus package to counter the economic downturn. Structural reforms, such as improving market competition, reducing administrative burdens, and enhancing the business environment, can amplify the impact of fiscal policy measures. Combining fiscal policy with structural reforms had a more significant effect on stimulating economic growth in China. In conclusion, timely and targeted fiscal interventions can have a positive impact on economic growth during recessions. Large-scale infrastructure projects, when implemented efficiently, have the potential to boost employment, drive domestic demand, and contribute to long-term economic development. The study recommended that policymakers should carefully identify and target sectors with high multiplier effects, such as infrastructure, innovation, and technology, to maximize the impact on economic growth. To maintain long-term fiscal sustainability, China should carefully manage public debt levels and ensure responsible fiscal practices. Continuous evaluation and monitoring of fiscal policy measures are essential to assess their effectiveness and make necessary adjustments. Keywords: Fiscal Policy, Economic Growth, Recession, China

Public–Private Collusion

We study collusion between a public firm and a private firm facing linear demand and quadratic costs. We characterize the collusive outcome that results from Nash bargaining and compare it to the non-cooperative outcome. If the public firm’s taste for consumer surplus is mild, both firms reduce output (as in a private duopoly). If it is intermediate, while the public firm reduces output, the private firm expands output to such an extent that total output increases. If it is strong, the private firm’s output expansion does not compensate for the public firm’s output contraction, and thus total output decreases. We also characterize collusion sustainability, and assess the impact of relative bargaining power, degree of cost convexity, public firm’s taste for total surplus, and cost asymmetry. We conclude that, by reducing the productive inefficiency that is caused by the public firm being more expansionary, collusion may lead to higher profits and consumer surplus.

Global financial uncertainty

SummaryWe estimate a novel measure of global financial uncertainty (GFU) with a dynamic factor framework that jointly models global, regional, and country‐specific factors. We quantify the impact of GFU shocks on global output with a VAR analysis that achieves set identification via a combination of narrative, sign, ratio, and correlation restrictions. We find that the contraction in world output during the Great Recession would have been 13% milder in absence of GFU shocks. We also find support for a global finance uncertainty multiplier: the more global financial conditions deteriorate after a GFU shock, the larger the world output contraction is.

Downward Nominal Wage Rigidity and Determinacy of Equilibrium

AbstractIt is well known in the literature that there is a tension between the frequency and duration of the zero lower bound (ZLB) on the nominal interest rate and the determinacy of equilibrium. In this short paper, I show that the presence of downward nominal wage rigidity (DNWR) resolves the tension by preventing a vicious cycle of price declines and output contractions under the ZLB. Consequently, the model with DNWR can replicate the long‐lived ZLB episodes observed in the data. It also implies a plausible size of output and inflation declines at the ZLB.

Sudden stops and reserve accumulation in the presence of international liquidity risk

We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to a pecuniary externality, individual agents overborrow and hold too little liquid assets relative to a social planner. This inefficiency rationalizes macroprudential policy intervention in the form of reserve accumulation at the central bank to stabilize trade and the real exchange rate. Our model quantitatively matches the depreciation of the real exchange rate and contractions in output, gross trade flows, and foreign reserve holdings during Sudden Stops.

Local governments’ efficiency and its heterogeneity – empirical evidence from a stochastic frontier analysis of Italian municipalities 2010-2018

ABSTRACT This paper investigates the efficiency of Italian local governments using Stochastic Frontier Analysis for the years 2010–2018. As a dependent variable of the cost function, we consider the total current expenditure for producing six ‘essential’ local public services: education (ancillary services), waste management, general administration, local police, public roads and planning, and social services. As outputs, we employ indicators for each of the six services in the multi-output cost function. In an alternative model specification, we use a composite indicator for the total output volume. Thus, we estimate a global efficiency score for each local government, for each year. The findings reveal that the total expenditure declined over time, more than proportionally than the contraction of output produced. Therefore, the global efficiency of Italian municipalities is estimated to be higher in 2018 than it was in 2010. Moreover, there is evidence of substantial scale economies and congestion effects, with municipalities with around 10,000 inhabitants being more efficient than their smaller and larger counterparts. Lastly, on average, local governments are more efficient in providing public services in the Northern regions than in the Southern ones, although efficiency does not decline monotonically moving South.

Market Volatility, Monetary Policy and the Term Premium

AbstractIn this article, we use time‐varying VAR models to study the effects of option‐implied measures of equity and bond market volatilities on the government bond term premium and key macroeconomic variables. We show that the high correlation between the two volatilities requires the shocks to these variables to be jointly identified. We find that a positive shock to the VIX reduces the term premium. We interpret this effect as the result of investors shifting their portfolios away from riskier assets. Also, a positive shock to the VIX has contractionary and disinflationary effects. By contrast, a positive shock to the Merrill Lynch Option Volatility Expectations (MOVE), which reflects heightened uncertainty about future changes in interest rates, raises the term premium. Similar to a VIX shock, an increase in bond market volatility also has a contractionary effect, although the negative effects on output and inflation are smaller. Both VIX and MOVE shocks resemble negative demand shocks, albeit of different intensity, to which the central bank responds by easing monetary policy. Depending on the type of volatility impacting the economy, a contraction in output can be associated either with a flattening or steepening of the yield curve.

Automated manufacturing system for carbon fiber-based twisted and coiled artificial muscles (TCAMs)

Carbon Fiber (CF) Twisted and Coiled Artificial Muscles (TCAMs) can replace traditional actuators in robotics and medical devices applications. CF TCAMs are currently made through a time-consuming and inconsistent manual process. This paper proposes a novel automated manufacturing system to produce CF-based TCAMs with repeatable and tailored geometry. This system reduces manufacturing time from 24 h to only 3 min, and experiments demonstrates that the system is capable of manufacturing TCAMs with repeatable performance. The maximum deviation of the output contraction between different TCAMs is reduced by 66%. This automated and scalable process will foster the use of TCAMs in several applications.

Macroeconomic impacts of remittances: A two-country, two-sector model

We examine the impacts of remittances on foreign direct investment and the development of developing countries using a macro-dynamic model of two small open economies—an advanced economy and a developing country. We incorporate a two-sector framework for the latter: traditional non-traded and foreign capital dependent traded sectors while introducing a collateral effect of remittances. The most important feature of the model is that remittances come from two sources: temporary migrant workers and permanent immigrants, and they are allocated between consumption and domestic investment through the household’s utility maximization. The results from extensive calibration exercises show that remittances in the presence of labor migration hurt the traded sector of the developing economy, leading to a contraction in the aggregate output. Albeit to a lesser extent, the contraction persists even with the expansionary impacts of remittances through the collateral effect. In addition, the migration policy of the developing countries can weaken other development efforts, giving rise to a phenomenon known as a migration-remittance trap.

Spread Too Thin: The Impact of Lean Inventories

Widespread adoption of just-in-time (JIT) production has reduced inventory holdings. This paper finds that JIT creates a trade-off between firm profitability and vulnerability to large shocks. Empirically, JIT adopters experience higher sales and less volatility while also exhibiting heightened cyclicality and sensitivity to natural disasters. I explain these facts in a structurally estimated general equilibrium model where firms can adopt JIT. Relative to a no-JIT economy, the estimated model implies a 1.3% increase in firm value. At the same time, an unanticipated shock results in a roughly 15% deeper output contraction. This occurs because firms "stock out" or hoard materials.

Impact of COVID-19 Pandemic on Demand, Output, and Outcomes of Construction Projects in Singapore

This study investigated the impact of COVID-19 pandemic on Singapore’s construction industry in terms of construction demand, output, prices and project performance. A three-pronged research approach was adopted: a survey, analyzing published statistical data, and conducting in-depth interviews with subject matter experts. The survey revealed that projects suffered significant delays and cost overruns and lower quality. It was found that construction demand and output decreased by 27.9% and 28.6%, respectively. Some project owners postponed awarding contracts or calling tenders because prices exceeded their budgets. While waiting for bid prices to decrease, they re-evaluated the feasibility, scope, design, budget, and timeline of their projects. Contraction of construction output was found to be due to a severe shortage of labor and to lower productivity as a consequence of complying with many safe management measures. The results of autoregressive time-series modeling predicted that tender prices will continue to rise in the short term before decreasing after mid-2022. Although manual labor may be replaced by productive technologies if technology is cheaper than labor, this was not found to be the case. The originality of this research is that it empirically quantified project outcomes due to the pandemic and predicted tender price indexes for the next 5 years. These predicted indexes are useful for estimating the risk and markup to be added to the base construction cost. The value of this research is that it informs policy makers that regulations need to be enacted to compel the adoption of productive technologies to reduce reliance on labor. Otherwise, the worker shortage problems faced in this pandemic may continue to surface in future pandemics. The implication of adopting productive technologies is that project owners must increase the project budget because these technologies cost more than manual labor. However, the cost might be passed to end users, who will end up paying more.

Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk

We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This ineffciency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents’ incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade flows, foreign liabilities and liquid reserves during Sudden Stop episodes.