Output Shocks Research Articles

Shock persistence, uncertainty, and news-driven business cycles

Abstract This paper distinguishes news about short-lived events from news about changes in longer term prospects using surveys of expectations. Employing a multivariate GARCH-in-Mean model for the US, the paper illustrates how the different types of news influence business cycle dynamics. The influence of transitory output shocks can be relatively large on impact but gradually diminishes over two to three years. Permanent shocks drive the business cycle, generating immediate stock price reactions and gradually building output effects, although they have more immediate output effects during recessions through the uncertainties they create. Markedly different macroeconomic dynamics are found if these explicitly identified types of news or uncertainty feedbacks are omitted from the analysis.

An unemployment re-insurance scheme for the eurozone? Stabilizing and redistributive effects

This paper develops a decomposition framework to study the importance of different stabilization channels of an unemployment re-insurance scheme for the euro area. Running counterfactual simulations based on household micro data for the period 2000–21 and studying the effect of different trigger variables and activation rules, the paper finds that the re-insurance would have cushioned on average 7%–14% (3%–6%) of employment income losses through interregional (intertemporal) smoothing. The simulated re-insurance scheme would have been revenue-neutral at EA-19, but not at the member-state level. Average annual inpayments and payouts would have been below 0.1 per cent of GDP. A back-of-the-envelope calculation shows that the re-insurance could offset up to 18% of future output shocks. These results suggest that a re-insurance would significantly strengthen public risk sharing in the euro area.

Financial resilience, growth and risk sharing in the EU

We build a financial resilience index capturing the structure and stability features of financial systems and benchmark EU financial systems against their ability to enhance stable growth and international risk sharing. The index comprises financial openness, market orientation, equity deepening, maturity structure, and institutional soundness. Our results show that: (i) EU financial systems are highly heterogeneous and converge to a clustered pattern; (ii) the index is highly significant in growth regressions, suggesting that financial structure and institutional soundness are key to enduring growth; (iii) the heterogeneity of EU financial systems has implications for the vulnerability to domestic output shocks: the risk-sharing mechanism is more effective in the market-based and institutionally sound economies that group in the top financial clusters, whereas unsmoothed consumption is higher in economies belonging to the low-resilience clusters, especially in the aftermath of the global financial crisis, when the credit channel is significantly downsized.

Analyzing the Impact of Monetory Policy Shocks on Output, Inflation and Exchange Rate Dynamics of Pakistan

The major objective of this study is to analyse that how monetary policy of Pakistan had impact on output, inflation and exchange rate fluctuations during Global Financial Crisis 2008-2009 in Pakistan. Quarterly data was used for this purpose. Data spans from 1990Q1 to 2022Q4. Time varying parameter – vector auto regression model (TVP-VAR) of Jouchi Nakajima (2011) has been used for analysis. Through this model we selected the time horizons such as 2008, 2009 and 2015 mainly to study the impact of monetary policy on different selected variables. Our empirical finding indicates that monetary policy shock plays an important role in the economic dynamics of Pakistan. The impulse response of inflation is negative to tight monetary policy shock (εi↑→ p), this is in accordance with the standard economic theory. In case of Pakistan, after 1990 there is declining trend in volatility of output and a considerable reduction in business cycle fluctuations. Policy rate is more volatile during 1998. After 2000 there is decline in volatility of policy rate but in 2008-09 there is rise in interest rate because of Global Financial Crises in 2007 and 2008. The response of policy rate to inflation shock is in rising trend in 2007 and 2008. The inflation is increasing as a response to positive output shocks after 12th quarter this rising trend is also evident during 2008 where the impact of output on inflation is long term.

International macroeconomic vulnerability

Small open economies are known to be impacted by shocks to larger economies. This phenomenon is known as macroeconomic vulnerability. We propose and implement a novel index of macroeconomic vulnerability to foreign shocks for a given pair of a large economy and a small open economy. It uses a structural time-varying Bayesian VAR with a block-exogeneity hypothesis. The index is based on the sum of the responses of the small open economy to shocks in the large economy over time, thus allowing us to disentangle and measure the source of the shock, the impact variables, and the duration of impact. We highlight two results out of the many that our index unveils. First, we do not find a difference between the international impact of U.S. shocks during periods of crises versus stability. Second, we find that there is a growing decouple between emerging markets (EM) and developed markets (DM) on how their domestic inflation is affected by U.S. output shocks. Our approach can also be used to elucidate previously unknown transmission channels or unmeasured theoretical mechanisms. Finally, using a sample of developed and developing countries, we find that global banks do not increase the macroeconomic vulnerability of a country.

A MODEL OF GROSS CAPITAL FLOWS: RISK SHARING AND FINANCIAL FRICTIONS

AbstractThis article builds a two‐country model of gross capital flows where agents share tradable output risk using two bonds, subject to stochastic collateral constraints. Equilibrium portfolios are short in domestic bonds and long in foreign bonds because the endogenous movements of the real exchange rate provide a hedge against domestic output shocks. Under negative domestic shocks, these external positions transfer wealth from home to abroad. During the Great Recession, the model shows that such wealth transfer from the United States mitigated the consumption drop abroad. Quantitatively, financial frictions account for about half of the collapse in U.S. gross flows in 2008.

The Casualty Evidence for Interest Rates and SME’s Outputs Relation from A Developing Economy

Purpose Small and medium-scale enterprises (SMEs) play a significant role in many economies. Governments often employ various policies, especially monetary policy, to support their operations. This study aims to illustrate the interdependence between SMEs' output growth and monetary policy instruments, specifically the interest rate. Methodology The study utilized data spanning 1980 to 2021 to investigate evidence of symmetric Granger causality and asymmetric causality between interest rates and SMEs' outputs in Nigeria. Findings The symmetric approach reveals unidirectional causality evidence from the interest rate to SME output, without potential feedback effects. The asymmetric causality demonstrates that both positive and negative shocks in interest rates drive shocks in SMEs' outputs, but not vice versa. Conclusion The study concludes, among other findings, that to enhance the impact of policies on SMEs' outputs, authorities should establish state agencies as coordinating units to monitor policy implementation. Additionally, efforts should be directed towards putting adequate infrastructural facilities in place for the proper operation of the SMEs. Practical Implications The study provides insights indicating that positive (negative) shocks in the interest rate cause negative (positive) shocks in SMEs output, thus aligning with the associated economic theory.

Analysis of output and output volatility connectedness of Nigeria, USA, China and India: new empirical insights from the global financial crisis versus 2016 Nigerian recession

PurposeThis paper aims to examine Nigeria’s dynamic output and output volatility connectedness with USA, China and India using quarterly data from 1981Q1 to 2019Q4.Design/methodology/approachThe study adopted the network approach of Diebold and Yilmaz (2014) and used the normalized generalized forecast error variance decomposition from an underlying vector error correction model to build connectedness measures.FindingsThe findings show that the global financial crisis (GFC) increased the connectedness index far more than the 2016 Nigeria economic recession. The moderate effect of the 2016 Nigeria economic recession on the connectedness index underscores the fact that Nigeria is a small, open economy with minimal capacity to spread output shock. For both real output and its volatility, the total connectedness index rose smoothly and systematically through time, thereby leaving the economies more connected in the long run.Originality/valueTo the best of the authors’ knowledge, this paper is among the first to examine Nigeria’s dynamic output and output volatility connectedness with the USA, China and India using new empirical insights from the GFC versus 2016 Nigerian recession. The study, therefore, concludes that the Nigerian economy should be diversified immediately as a hedge against future real output shocks, while the USA, China and India should maintain and sustain their current policy frameworks to remain less vulnerable to real output shocks.

Exchange rate pass-through in emerging Asia and exposure to external shocks

Using a time-varying parameter SVAR model over the period 1994 to 2021, this paper provides estimates of exchange rate pass-through (ERPT) to both producer and consumer prices for nine emerging Asian economies. We also examine the role of four global shocks as propagation channels to both producer and consumer price ERPT, specifically via oil prices, global output, US monetary policy, and the VIX. Our main findings are: (i) ERPT is incomplete and mostly higher for ERPT to producer than consumer prices; (ii) longer-term ERPT to producer and consumer prices is mostly greater in magnitude than shorter-term ERPT; (iii) ERPT has been declining for most Asian EMEs since around 2010; (iv) oil price and global output shocks mostly affect longer-term producer price ERPT in emerging Asia; and (v) US monetary policy and VIX shocks mostly affect longer-term consumer price ERPT in emerging Asia.

The Response of Employment to Output Shocks in Egypt

The Response of Employment to Output Shocks in Egypt

Does financial inclusion promote consumption smoothing? Evidence from emerging and developing economies

An important issue for emerging and developing economies (EMDEs) is how to reduce the occurrence of hand-to-mouth consumption by allowing consumption smoothing. Financial inclusion increases access to the formal banking system and financial markets, and allows households to use more appropriate financial instruments, which should enable them to diversify consumption, disrupting the connection to idiosyncratic income shocks. This paper empirically investigates whether financial inclusion can smooth consumption and promote risk sharing for a large heterogenous sample of 85 EMDEs for 1995 to 2017. We find that financial inclusion decreases the volatility of consumption and reduces deviations in country consumption vs world consumption. Curiously, we find that financial inclusion does not help countries improve risk sharing by lowering their exposure to idiosyncratic output shocks. We further find that risk sharing through domestic credit markets expands with financial inclusion, although it does not appear to reduce unsmoothed consumption.

New evidence on sources of macroeconomic fluctuations in sub‐Saharan African countries

AbstractFollowing a global vector autoregressive (GVAR) approach, this paper presents new evidence on the validity of international transmission of economic shocks from key trading partners as sources of macroeconomic fluctuations in sub‐Saharan African (SSA) countries. The GVAR model was estimated for 21 SSA countries grouped into three country classes—oil‐rich, other‐resources‐rich and non‐resource‐based economies, to account for output shocks from crucial trading partner countries—United States, United Kingdom, China and Europe. Furthermore, the generalized forecast error variance decompositions results reveal that output shocks from key trading partners constitute significant contributors to changes in key macroeconomic indicators—real gross domestic product, inflation, exchange rate and short‐term interest rate, in the SSA region. The generalized impulse response functions indicate that these economic shocks have more significant impacts on oil‐rich countries than on other country groups. A key recommendation from this study is that SSA countries, especially the resource‐rich economies, need to strengthen and diversify their economic structure, including the trade basket.

Impacts of oil shocks on stock markets in Norway and Japan: Does monetary policy's effectiveness matter?

This paper examines the simultaneous effects of oil shocks on stock markets under different regimes in Norway (as an oil-exporting economy) and Japan (as an oil-importing economy). We use a Structural Threshold VAR model and rely on the monetary policy's effectiveness. Our results show that oil shocks, mainly oil demand shocks, are significantly associated with the oil structure of the country (oil-exporting or oil-importing), channels of the effectiveness of the monetary policy, and the stock market regimes. Furthermore, the channel through which the money supply growth affects Norway's economic growth depends on the stock market regimes. Moreover, the results persist for the money growth-inflation nexus. Similarly, the impact of oil demand shocks depends on the Japanese stock market's regime and the monetary policy's effectiveness. Finally, we find that positive output shocks positively affect the stock markets of both countries in the long run regardless of the stock market conditions. In the short run, a positive inflation shock has a negative (positive) impact on Norway (Japan) during bullish and bearish market conditions.

Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework

We conducted a study analyzing the impact of productivity shocks on equity returns in the U.S. economy from Q1 1960 to Q1 2022 using an RBC DSGE model. Our results suggest that while initial productivity shocks lead to higher equity returns, this effect fades within eight quarters. Nonetheless, such shocks can still provide valuable signals for investors to strategically allocate their investments in sectors that may benefit the most. Our study also found that the responses of key macroeconomic variables, including real GDP, are consistent with those observed in other calibration based DSGE models of the U.S. in previous research.

Построение модели GVAR для российской экономики

The relationship between the economies of various countries and their dependence on the world markets indicate that for econometric analysis of the impact of external shocks on a particular economy, it is necessary to use a model of the global economy. The aim of this paper is to build a global vector autoregression model (GVAR), including Russia as one of the regions, and to obtain the impact of some external economic shocks on Russian macroeconomic indicators. We build a model that includes 41 of the world's major economies, including Russia, and the oil market. The special features of our model are structural shifts in the dynamics of Russian output and the new specification of oil supply and oil demand. Impulse response functions are used to obtain quantitative estimates. In this paper, we analyze the reaction of outputs, oil production volumes and oil prices in response to the output shocks of China and the United States. In response to the negative shock of output in the world's leading economies, outputs in the rest of the world declined for at least the first year after the shock. There was also a significant decline in oil prices and no significant change in oil production volumes in most countries. In addition, as part of the conditional forecast, we estimated the impact of the decline in global demand due to the Covid-19 pandemic on the Russian GDP as 1,3% drop. The rest of the de cline in Russian GDP can be attributed to the internal effects of the pandemic (lockdown). We also obtained a scenario forecast of the dynamics of Russian GDP depending on a decrease in trade and Russian oil price discount, within which the fall in Russian output could reach 3.3% in 2022.

Estimating the size of Nigeria's output connectedness with China, India and USA: a normalised generalised forecast error variance decomposition approach

This paper investigated the size of Nigeria's output connectedness with China, India and USA, with particular focus on Nigeria's latest democratic era that began in 1999. The study used the normalised generalised forecast error variance decomposition (GFEVD) of the underlying vector error correction (VEC) model to construct the connectedness measures. The findings reveal that India and China are the largest contributors of spillover index in the system. Overall, the size of the connectedness index of the economies is 34.55%, which shows remarkable output spillovers among these countries. The policy implication of these results is that Nigerian economic authorities should closely monitor the output fluctuations around the world, especially those of Nigeria's top trade partners like India and China in order to mitigate adverse output shocks.

Comparative Analysis of ARIMA and Artificial Neural Network Techniques for Forecasting Non-Stationary Agricultural Output Time Series

With the vast popularity of the deep learning models in the engineering and mathematical fields, Artificial Neural Networks (ANN) have recently attracted significant research applications in agriculture, economics, informatics and finance. In this paper, we use a deep learning method to capture and predict the unknown complex nonlinear characteristics of agricultural output based on autoregressive artificial neural network, using Nigeria as a case study. Using the proposed model, shocks in agricultural output is analyzed and modeled using data obtained for a period of forty years (1980-2019), and compared with analyses obtained from the autoregressive integrated moving average model (ARIMA). This result is significant because it justifies the superiority of the hybrid ANN model over the traditional Box-Jenkins methodology for forecasting non-stationary time series. The empirical results show that the proposed autoregressive ANN model achieves an improved forecasting accuracy over the traditional Box-Jenkins ARIMA method. It is further proposed that various types of artificial neural networks would be useful in forecasting and solving relevant tasks and problems widely defined in global agricultural production.

Cross‐country linkages between ASEAN and non‐ASEAN‐RCEP member states: A global VAR analysis

AbstractThe complex global value chains underlying the Regional Comprehensive Economic Partnership (RCEP) raise an important question on the macroeconomic (output, inflation, exchange rate, and interest rate) exposure of ASEAN to output shocks in the non‐ASEAN‐RCEP members, within the context of expanded regional architecture. This paper uses quarterly data from 1995 to 2018 to estimate a global vector autoregressive (GVAR) model, specially constructed for the RCEP. The GVAR model disentangles the effects and spillovers from output shocks originating in the non‐ASEAN‐RCEP through various trade channels – direct and indirect, and total exports and foreign value‐added (FVA). The model also quantifies the impact of global (the price of oil and materials) shocks on ASEAN through trade linkages. The output shocks in the non‐ASEAN‐RCEP have persistent effects on output growth in ASEAN when transmitted through the intermediary FVA channel than the export channel. The FVA channel is also important for propagating global shocks in the form of oil and material prices. The findings confirm that output in ASEAN is also highly exposed to output shocks originating in the non‐ASEAN‐RCEP economies. The FVA trade channel is vital for explaining the spillovers from the regional output shocks and global price shocks.

Private and public risk sharing across Italian regions

This paper measures the level of total risk sharing across Italian regions and compares the role of private and public risk sharing mechanisms over the period 2000-2016. Our findings suggest that market mechanisms of risk sharing are the main tool to absorb region-specific output shocks: labour mobility and interregional earnings flows absorbed 38 percent of idiosyncratic shocks against 17 percent of interregional fiscal transfers. Overall, risk-sharing channels smooth about 76 percent of region-specific shocks and their role is even stronger during crisis periods.

International risk sharing for food staples

The global output of food staples is far more stable than most individual nations' outputs, but does this lead to consumption risk sharing? This paper applies tools from the risk sharing literature to address this question for rice, wheat, and maize, using a multilateral risk sharing model that, unlike the canonical model, accounts for trade costs. While the data show that optimal risk sharing does not occur, the wheat market comes closest to the idealized model. Our analysis also implies that both trade and storage play significant roles in smoothing domestic output shocks. Further, we find that risk sharing tends to rise with a nation's income.