Positive Co-movement Research Articles

Changes in the Inflation Target and the Comovement Between Inflation and the Nominal Interest Rate1

Would raising the inflation target require an increase in the nominal interest rate in the short run? We answer this policy question, first analytically in a small‐scale New Keynesian model with backward‐looking components where a closed‐form solution exists, and then, in a medium‐scale Smets and Wouters model calibrated to the US economy. Our analysis shows that the short‐run comovement between inflation and the nominal interest rate conditional on changes in the inflation target is more likely to be positive, all else equal, as the monetary authority reacts less aggressively to the deviation of inflation from its target. Meanwhile, features of the model that enhance backward‐looking behaviour, such as backward price indexation and habit formation in consumption, are shown to reduce the likelihood of the positive comovement. However, our investigations reveal that in both models, this positive comovement or the so‐called Neo‐Fisherism is prevalent across a wide range of empirically plausible parameter values. Using the Smets and Wouters model with a zero lower bound (ZLB) constraint on the nominal interest rate, we show that raising the inflation target could be an effective alternative policy framework to reduce the possibility of a binding ZLB constraint and to mitigate the potentially large output loss.

African sovereign risk premia and international market assets: A relook under the COVID-19 outbreak

Using the wavelet multiscale coherence technique, the paper examines the interdependences between global market assets, sovereign credit default swap (CDS) and yield-to-maturity on bond spread for African economies from January 2019 to March 2023. The empirical results primarily reveal a high level of coherence between global market assets and Africa's sovereign CDS and yield-to-maturity, although varying across countries and time-frequency domain. Notably, the high degree of coherence and the positive co-movement between sovereign CDS and global market assets are more concentrated at the medium and upper frequency bands. The observed intensity of co-movements between global market assets and sovereign CDS/yield-to-maturity (YTM) of bond spread, with global market assets broadly serving as leading variables, suggests that an increased global investor's risk aversion positively affects the yields on Africa market bonds. Among the global market assets, we identified that VIX (which is implied volatility of S&P500) has the dominant influence on Africa sovereign CDS/YTM compared to that emanating from Bitcoin and Godman Sachs Commodity Index. This is highly conceivable as VIX gauges bubbling global risks and uncertainties which considerably influences investor's risk aversion. The heterogeneous lead/lag dynamics also provide useful information to global investors, including by utilizing African markets to rebalance their portfolios for risk management purposes. The empirical findings thus provide further critical information to investors for hedging purposes, and to policymakers in formulating sovereign risk management policies oriented towards minimizing sovereign default risks.

Harbor in the storm: How Bitcoin navigates challenges of climate change and global uncertainties

Harbor in the storm: How Bitcoin navigates challenges of climate change and global uncertainties

COVID-19 and time-frequency spillovers between oil and sectoral stocks and portfolio implications: Evidence from China and US economies

COVID-19 and time-frequency spillovers between oil and sectoral stocks and portfolio implications: Evidence from China and US economies

Food security in Pakistan: Investigating the spillover effect of Russia-Ukraine conflict

Food security in Pakistan: Investigating the spillover effect of Russia-Ukraine conflict

Can green bonds be a safe haven for equity investors?

AbstractWe investigate if green bonds can act as a safe‐haven asset for equity investors by analysing their relationship with stocks and other alternative safe havens, namely sovereign bonds and gold. Safe havens are defined as assets that exhibit zero or negative comovement with equity during a stock market downturn. We analyse the interrelationships between the asset classes using the Marginal Expected Shortfall of Acharya et al. (The Review of Financial Studies, 30(1), pp. 2–47, 2017) and by comparing the regime‐dependent GIRFs from a Markov‐switching VAR model. Our results suggest that green bonds are not safe haven assets for equity investors but rather show positive comovement during periods of market stress. The sovereign bond is the most consistent in delivering diversification benefits across market conditions, while gold acts as a safe‐haven asset during all regimes except during rare periods of extreme turbulence.

Monetary policy independence in an era of financial globalization: what theory suggests and the data in Oceania say

ABSTRACT This paper shows that under a floating exchange rate and integrated financial markets an optimizing central bank concerned about price and output stability partly accommodates a change in monetary policy abroad. A positive co-movement between the domestic policy rate and the foreign interest rate does not indicate lack of monetary policy independence but is an outcome of optimal policymaking in an open economy deeply embedded in the global financial architecture. Empirical evidence on overnight interest rate changes in Oceania (New Zealand, Australia) and US federal funds rate changes is consistent with this view.

The Time‐Varying Price of Financial Intermediation in the Mortgage Market

ABSTRACTWe introduce a new measure of the price charged by financial intermediaries for connecting mortgage borrowers with capital market investors. Based on administrative lender pricing data, we document that the price of intermediation reacts strongly to variation in demand, reflecting capacity constraints of mortgage originators. This positive comovement of price with quantity reduced the pass‐through of quantitative easing. We also find a notable upward trend in this price between 2008 and 2014, likely due to increased legal and regulatory burden in the mortgage market. The trend led to an implicit cost to borrowers of nearly $100 billion over this period.

Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe

Is there an optimal level of leverage? The case of banks and non-bank institutions in Europe

The Co-Movement Between Commodity Prices and the Economic Growth of Malaysia

AbstractResearch Originality: This research is an initial attempt to unveil the structure of the dynamic relationship between commodity prices and the economic growth of Malaysia at various frequencies and moments in time.Research Objectives: This paper investigates the co-movement and lead-lag relationship between commodity prices and the economic growth of Malaysia at different frequencies and moments in time. Research Methods: The relationship between the variables is studied based on monthly data from 2015 to 2022 using the time-frequency analysis of Continuous Wavelet Transformation model. This method analyses the direction and lead-lag relationship between two time series to determine which variables are leading and the direction of their co-movement. Empirical Result: The relationships between commodity prices and economic growth are varied depending on frequency and moments in time. In the short run, most commodity prices exhibit an inverse relationship led by economic growth. Meanwhile, a positive co-movement with economic growth is indicated for most commodity prices in the medium run. These variables mostly move in unison, except for rubber and palm oil, which led the relationship. Nevertheless, the co-movement of commodity prices and economic growth showed a diminishing magnitude in the long run.Implications: Malaysia's policy frameworks should consider the economic dynamic responses towards commodity prices in facilitating its economic growth. In addition, efforts should be made to diversify economic activities, reducing the level of dependence on commodities in the country’s trade basket.JEL Classification: Q32, O44, O11How to Cite:Pinjaman, S., Taasim, S.I., Yun, W.S., & Yassin, J. (202x). The Co-Movement Between Commodity Prices and the Economic Growth of Malaysia. Etikonomi, 23(1), 11 – 26. https://doi.org/10.15408/etk.v23i1.34368.

Co-movement between carbon emissions and forex market: A tale of COVID-19 outbreak and Russia-Ukraine invasion

Co-movement between carbon emissions and forex market: A tale of COVID-19 outbreak and Russia-Ukraine invasion

Time-varying Relationship between Fossil Fuel-Free Energy Indices and Economic Uncertainty: Global Evidence from Wavelet Coherence Approach

Considering the abysmal environmental impacts of anthropogenic activities, the entire world has been striving to shift toward a green economy. Also, the transition to a greener economy entails green financing, which escalates the pace and performance of environment-friendly economic activities. However, uncertain economic conditions might be a hindrance to green financing. Based on this, I investigate the co-movement of fossil-fuel-free energy equity indices returns and Twitter-based economic uncertainty using a wavelet coherence approach. The findings document that global, the US, and Japanese fossil-fuel-free indices show strong and positive co-movement with Twitter economic uncertainty for short- and medium-term investment horizons. However, a weak positive co-movement is observed during the Russia-Ukraine war. Based on these interesting findings, I suggest many policy implications.

Synergistic dynamics unveiled: Interplay between rare earth prices, clean energy innovations, and tech companies' market resilience amidst the Covid-19 pandemic and Russia-Ukraine conflict

Synergistic dynamics unveiled: Interplay between rare earth prices, clean energy innovations, and tech companies' market resilience amidst the Covid-19 pandemic and Russia-Ukraine conflict

Exchange rate pass-through in small, open, commodity-exporting economies: Lessons from Canada

Exchange rate pass-through in small, open, commodity-exporting economies: Lessons from Canada

Measuring the extreme linkages and time-frequency co-movements among artificial intelligence and clean energy indices

Measuring the extreme linkages and time-frequency co-movements among artificial intelligence and clean energy indices

Assessing the linkage of energy cryptocurrency with clean and dirty energy markets

Assessing the linkage of energy cryptocurrency with clean and dirty energy markets

Pessimism, Disagreement, and Economic Fluctuations

Abstract The pessimistic bias and the cross-sectional dispersion of households’ subjective beliefs heighten during recessions. We provide empirical evidence for a dominant non-inflationary aggregate demand shock that accounts for the bulk of business-cycle fluctuations not only in real quantities but also in (1) pessimism—to what degree households are more pessimistic than the rational expectation benchmark and (2) disagreement—the cross-sectional dispersion of households’ beliefs. To rationalize the empirical findings, this paper develops a theory of ambiguity-driven business cycles, where the Bayesian formulation of the ambiguity shock can generate positive co-movements across real quantities together with counter-cyclical pessimism and disagreement within the real business-cycle framework. Our theory reproduces the salient features of the business cycles extended with survey data on households’ expectations. Quantitatively, the ambiguity shock alone accounts for a significant fraction of the business-cycle fluctuations in pessimism, disagreement, and real quantities.

Connexion Between Cryptocurrencies Liquid and Futures Markets: Discernment from Static, Dynamic and Wavelet Approach

The knowledge of the interconnectedness between liquid and futures markets of cryptocurrencies amidst dynamic contemporary environment can be enriched through the full characterization of the direction, persistence and intensity of information flows between these markets. So, the present study attempts to investigate the static and dynamic connexions between liquid and futures markets of Bitcoin, Ethereum, Litecoin, Ripple XRP and Bitcoin Cash from June 2018 to June 2022. The connexion between their liquid and futures markets is first investigated using unconditional correlation, Johansen’s cointegration, vector error correction and Wald’s block exogeneity. Their estimates discern connexions encompassing significant long-run relationships between their liquid and futures markets; momentous unidirectional long-run causality from their futures market to liquid market; and momentous bidirectional short-run causality from their liquid market to futures market and from their futures market to liquid market. The present treatise encompasses methodological advancement in the investigation of interconnectedness between these markets by employing a dynamic conditional correlation model and a wavelet transform framework. Their discerned estimates indicate that the markets of Bitcoin, Litecoin, Ethereum and Bitcoin Cash have only momentous long-run perseverance, lingering and spillover effects of shocks’ sway on conditional correlations. However, there is momentous short- and long-run perseverance, lingering and spillover effects in the case of Ripple XRP. The wavelet coherence analysis also confirms these results by indicating a bidirectional short-run causal relation and a long-run positive comovement between liquid returns and futures returns of these cryptocurrencies. These discernments may help investors, portfolio managers and policymakers to enhance hedging effectiveness through optimal portfolio allocation and monitor financial contagion to attain and sustain financial stability in economies.

Evidence on monetary transmission and the role of imperfect information: Interest rate versus inflation target shocks

Evidence on monetary transmission and the role of imperfect information: Interest rate versus inflation target shocks

Wealth effects, price markups, and the neo-Fisherian hypothesis

The present paper thoroughly investigates the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock - the so-called neo-Fisherian hypothesis in a New Keynesian framework. By introducing Jaimovich-Rebelo (JR) consumption-labor nonseparable preferences into an otherwise standard New Keynesian model, we show that neo-Fisherianism depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with weaker wealth effects in labor supply (in particular for Greenwood-Hercowitz-Huffmann preferences where wealth effects are absent), smaller price-to-wage markups (for which the steady state is less distorted), and smaller real wage rigidity. Following a permanent interest rate shock, the neo-Fisherian hypothesis is guaranteed to hold regardless of the utility preferences or degree of real wage rigidity. A more prominent presence of endogenous capital works in favor of neo-Fisherianism. Finally, the stabilizing properties of Taylor rules under JR preferences are scrutinized.