post-GFC Period Research Articles

Fiscal Supermultiplier and Endogenous Money in the United States: The COVID-19 Pandemic vs. the Global Financial Crisis*

ABSTRACT The paper examines different real-monetary dynamics and policy responses during the COVID-19 pandemic (C19P) and the Global Financial Crisis (GFC) in the United States through the lens of the Sraffian Supermultiplier model and the endogenous money approach. On the one hand, the C19P triggered a relatively deeper contraction in GDP, but its recovery was relatively faster and more robust. The ‘V’ shaped recovery from the C19P significantly contrasted the ‘L’ shaped trajectory of the post-GFC period. On the other hand, the money supply (M2) grew relatively more, and the monetary base expanded relatively less during the C19P. To explain these different real-monetary dynamics, a theoretical framework is developed and analyzed empirically for the United States. The theoretical model and the empirical analysis suggest that money supply is endogenously determined by creditworthy demand derived from the multiplier-accelerator effect of non-capacity generating autonomous demand, in which government spending plays a key role. Therefore, the absence of full hysteresis after the C19P shock had nothing to do with a traditional neoclassical trend reversal mechanism but with the fiscal supermultiplier effect of the extraordinary pandemic-related government spending.

From export boom to private debt bubble: a macroeconomic policy regime assessment of Canada’s shifting growth regime

This paper examines the emergence of private debt-led growth in Canada since the Global Financial Crisis (GFC) by means of a growth regime and macroeconomic policy regime assessment. Examining each of the four business cycles in the 1983–2020 period, roughly encompassing the entirety of the neoliberal period, results demonstrate the emergence of a ‘rising’ weakly export-led growth regime in the early 1990s, a shift to a ‘falling’ weakly export-led regime by 2001, and a turn to a debt-led private demand regime since the GFC. The macroeconomic policy regime then identifies the structural changes and policy factors that have contributed to Canada’s shifting growth regime. While price competitiveness played an important role in the first three cycles, it failed to re-establish an export-led regime in the post-GFC period due to decreased non-price competitiveness. Instead, the post-GFC combination of low real interest rates, which encouraged the accumulation of private debt and fiscal policy, which ex post did not address the negative financial balances of the household sector, supported the turn to private debt-led growth.

Analysing implied volatility smirk to predict the US stock market crash during the global financial crisis

This study analyses the presence of implied volatility smirk (IVS) and its predictability of the US stock market crash during the Global Financial Crisis (GFC) through the in-sample and out-of-sample tests. The in-sample investigation was conducted for 18 cases (cases 1–18) to confirm the development of IVS during GFC (2007–2009). It also examined another 18 cases (cases 19–36) to ensure the absence of the IVS in the post-GFC period (2010–2011). Finally, an out-of-sample test analysed 63 cases (cases 37–99) to assess the predictability of IVS for the stock market crash during the GFC. The study reveals several critical findings. The in-sample test results show the negative return from simultaneous trading of out-of-the-money put options (OTMP) and at-the-money call options (ATMC) due to out-of-the-money put options implied volatility (OTMPIV) is higher than at-the-money call options implied volatility (ATMCIV) for all 18 cases (cases 1–18), confirming the development of IVS during GFC. However, findings of the in-sample test for cases 19–36 reveal the positive return from simultaneous trading of OTMP and ATMC because of the lower value of OTMPIV compared to ATMCIV, ensuring no occurrence of IVS in the post-GFC period. Finally, only 13 out of 63 cases (from cases 37–99) under the out-of-sample test show the IVS can forecast negative returns in an abnormal stock market. Further, the predictability of IVS for the US stock market crash depends on the maturity of options, forecast horizon, and options trading period

Holding the economy by the tail: analysis of short- and long-run macroeconomic risks

We put forward a macro-financial empirical modeling framework that can examine the tails of distributions of macroeconomic variables and the implied risks. It does so without quantile regression, also allowing for non-normal distributions. The framework offers a number of relevant insights into higher moments of the US output growth distribution, as well as the effects of monetary policy and financial (risk premia) shocks on downside macroeconomic risk. This is not only from the short-run perspective but also from the long-run perspective, which has remained largely unexamined in the existing Macro-at-Risk literature. In particular, we estimate the short-run (conditional) and long-run US output growth distributions and study their evolution. The short-run analysis finds that monetary policy and financial shocks render the conditional output growth distribution asymmetric. As such, they affect downside risk over and above their impact on the conditional mean that policymakers routinely focus on. The long-run analysis indicates that US output growth left-tail risk showed a general downward trend in the two decades preceding the Global Financial Crisis (GFC), but this trend got reversed post-2008. Our examination strongly points to the adopted unconventional monetary policy framework featuring quantitative easing as a potential source of elevated long-run downside tail risk in the post-GFC period.

Does ESG impact systemic risk? Evidencing an inverted U-shape relationship for major energy firms

Following recent financial, health, and geopolitical events, concerns are growing regarding the systemic risk of global energy companies. We assess the impact of environmental, social, and governance (ESG) performance on the systemic risk of leading energy firms. For 158 energy firms from 16 countries for 2010–2021, we evidence that while ESG shows positive association with default risk, squared values of ESG performance are negatively significant, consistent with an inverted U-shaped association. Moreover, better ESG disclosure and carbon performance also reduce default risk. We interpret our results as the beneficial impact of ESG on lowering default risk depends on the threshold level of ESG investment. Results, holding only for the post GFC period, for firms with more than one environmental controversy, and for countries with higher levels of education, are consistent with an evolving need for energy firms to employ genuine ESG commitment to establish reputational capital towards enhancing resiliency.

Climate change and fossil fuel prices: A GARCH-MIDAS analysis

In this study, we investigate the connection between climate change and the volatility of fossil fuel prices using the GARCH-MIDAS framework which accommodates mixed data frequencies and by extension circumvents information loss due to splicing or aggregation of one variable for the other. We conduct a battery of robustness tests that allow for nominal and real prices of fossil fuels as well as global financial crises (GFC). We show a strong connection between climate change and the volatility of fossil fuel prices albeit with stronger evidence in the post-GFC period. The outcome is positive in the recent period and therefore climate change seems to have heightened the volatility in the fossil fuel market. Even when the real prices are considered, results remain consistent, indicating that inflationary pressures do not diminish the effect of climate change on fossil fuel price volatility. We also show that own market risk positively impacts the volatility of fossil fuel prices and the volatility tends to persist when there is a shock to the fossil fuel market. More conscious efforts are needed to effectively discourage increased investments in environmentally-degrading assets.

Disentangling demand and supply side determinants of post-GFC credit slowdown: an Indian perspective.

In an emerging market economy (EME) that depends largely on bank-credit, it is important to decipher whether supply-side or demand-side factors are responsible for a sluggish credit growth phase. A formal empirical analysis using Indian data and a disequilibrium model suggests that demand side factors have majorly contributed to the credit slowdown during the post-GFC period and prior to the pandemic. This could be because of adequate supply of funds, and several concerted policy actions taken by the regulatory authorities to mitigate concerns over the asset quality risks. In contrast, lower investment demand and global supply side bottlenecks have often contributed to demand side weaknesses, suggesting the need for strong policy support to uphold credit demand.

Macro news effects on exchange rates: Difference between carry trade target and safe-haven currencies

We compare the effects of the US macro news on the exchange rates of carry trade target currencies and safe-haven currencies in the post-GFC period. Relying on the data of 5-min changes of exchange rates, we find significant responses of currencies to the surprises of the US macro news. The significance of responses was similar between the two types of currencies during the normal periods, but were weaker for target currencies in the turmoil periods. Furthermore, the turmoil periods witnessed more diverged effects of macro news between carry trade target currencies and safe-haven currencies.

Understanding the current global regime shift and the standing of the macro-financial system resilience

Understanding the current global regime shift and the standing of the macro-financial system resilience

Market risks that change US-European equity correlations

We study the options-implied market risks that affect US-European stock-return correlations during 2007–2021. We discover that U.S. stock- and bond-market uncertainty, stock-market tail risk, European equity-market risk, and global credit risk are dominant contributors to changing US-European stock correlations during the GFC period. However, these market risks collectively contribute less to correlations in the post-GFC period. Further, correlations rise in times of rising U.S. stock and bond market risks. Rising equity tail risk and global credit risk raise correlations in the GFC period but lower them in the post-GFC period. Also, European stock-market uncertainty exerts a negative influence on stock correlations. Our results disentangle the risks of U.S. and European stock and bond markets that change the cross-market diversification benefits.

Book Review of Trauma to triumph: rising from the ashes of the Asian Financial Crisis

Trauma to triumph: rising from the ashes of the Asian Financial Crisis (edited by Hoe Ee Khor, Diwa C. Guinigundo and Masahiro Kawai) is an epic endeavor to link the devastation and “trauma” from the 1997-98 Asian Financial Crisis (AFC) in the ASEAN+3 region to the adoption of key domestic structural reforms and the establishment of regional !nancial cooperative mechanisms, which would be instrumental to the region’s “triumphs” of recovering and growing in the AFC’s aftermath, weathering the adverse effects of the 2007-08 Global Financial Crisis (GFC) and even thriving in the post-GFC period. In the midst of the still looming threat of the COVID-19 global pandemic, and the new threats posed by the Ukraine-Russia war and cost-push global in"ation, the titular “triumph” may also extend to the current opportunities for greater regional cooperation to overcome these challenges.

The Impact of Crude Oil Prices on Macroeconomic Factors in Korea

Purpose - The purpose of this study is to examine how Korea’s macroeconomic factors, such as GDP, CPI, Export, Import, Unemployment rate and USD/KRW exchange rate, are affected by the oil price shocks. Design/methodology/approach - This study used monthly and quarterly time-series data of each variable for the period 1983 to 2022, consisting of two sub-periods, to employ Granger causality test and GARCH method in order to identify the role of the oil price movement in macroeconomic factors in Korea. Findings - Korea’s currency rate to the US dollar is negatively correlated with the price change of crude oil while the GDP change is positively correlated with the price change of crude oil with strong relationship between Export and Import in particular. The exchange rate and GDP growth are believed to be not correlated with the oil price change for the pre-GFC period. According to the Granger causality test, the price change in crude oil has a causal impact on CPI, Export and Import while other factors are relatively slightly affected. Transmission effect from the oil price to Export is found and there also exists volatility spillover from oil price to economic variables under examination. Comparing two sub-periods, CPI and Export volatility responds negatively to shocks in the oil price for the pre-GFC period while volatility of CPI and Unemployment reacts positively to the oil price shocks for the post-GFC period. Research implications or Originality - The findings of this study could be helpful for both domestic and international investors to build their portfolio for the risk management since rising WTI price can be interpreted as a result of global economic growth and ensuing increase in the worldwide demand of the crude oil. Consequently, the national output is expected to increase and the currency is also expected to be strong in the long run.

Bank competition, interest rate pass-through and the impact of the global financial crisis: evidence from Hong Kong and Macao

PurposeThe authors examine the interest rate pass-through in Hong Kong (HK) and Macao both in the long term and short term.Design/methodology/approachThe authors use time series methodology, i.e. unit root, cointegration and error correction models.FindingsThe results show that in the post-global financial crisis (GFC) period, both the long-run and short-run interest rate pass-through from policy rates to prime rates have disappeared in Macao and are weakened significantly in Hong Kong. The long-term relationship between deposit rates and policy rates no longer exists in either market while the short-term relationship has been reduced significantly.Research limitations/implicationsThe results indicate that the effectiveness of monetary policy in HK and Macao has been seriously undermined in the post-GFC period. New tools are needed in both regions.Practical implicationsMonetary policy transmission via bank interest rates in both HK and Macao are no longer effective after the outbreak of the GFC.Social implicationsEffort to stimulate the economy and/or control inflation will be hampered.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the impact of the GFC on the effectiveness of monetary policy transmission in HK and Macao.

Covered interest rate parity deviations in the Asia-Pacific

Recent evidence has documented a failure in the covered interest rate parity (CIP) condition post Global Financial Crisis (post-GFC). Using a model which incorporates the transaction costs embedded in the bid-ask spread, we find evidence that while raw deviations from this relation have increased, market makers spreads have also widened, resulting in a decreasing trend in both the magnitude and duration of CIP deviations after adjusting for transaction costs. This finding, however, is highly market specific and varies considerably between developed and emerging market countries. These conclusions are robust to the post-GFC period and trading strategies designed to exploit these deviations were found to generally perform poorly.

Employment Growth in India’s Organized Manufacturing in the Post-GFC period

Employment Growth in India’s Organized Manufacturing in the Post-GFC period

Bank size, competition, and efficiency: a post-GFC assessment of Australia and New Zealand

This paper investigates the impact of the global financial crisis (GFC) on banking market structure and efficiency in both countries, and the relationship of bank size and market competition with cost and profit efficiencies. Efficiencies of 11 Australian and New Zealand large commercial banks are estimated with a one-stage stochastic frontier approach (SFA) for the period 2003–2017. The Herfindahl- Hirschman Index (HHI) and Lerner index are used as proxies for market competition along with eight banking environment variables. Cost and profit efficiencies significantly declined during 2008 and 2009, but the impact of the GFC persisted longer in New Zealand than in Australia. The level of risk and competition has reduced, and bank size increased in the post-GFC period. Bank size is found to be positively associated with bank efficiency. Market competition negatively influenced cost and profit efficiencies during the study period, especially after the GFC.

Legal and financial constraints and firm growth: small and medium enterprises (SMEs) versus large enterprises

We investigate the impact of financing and legal obstacles on firm growth across different firm sizes before and after the global financial crisis (GFC). Using two enterprise surveys in Vietnam, we find firms facing higher financing obstacles have lower sales and employment growth. The smallest firms are the most adversely affected by financing obstacles. The legal obstacles impede the employment growth of SMEs more than large enterprises, which is attributable to the tendency of firms to avoid tall poppy syndrome and the scrutiny of tax officials. Furthermore, we find that the negative effects of financing obstacles on small firms' sales and employment growth reduce in the post-GFC period. We attribute it to a higher proportion of small firms being able to borrow from commercial banks after the financial crisis, partly due to the introduction of new policies supporting SMEs from the Vietnamese Government. Overall, our findings recommend to policymakers that improvement in access to finance is imperative for productivity increases and job creation for small and medium firms.

Do Deposit Insurance Systems Promote Banking Stability?

During the global financial crisis (GFC), regulators and policymakers turned to deposit insurers, along with monetary and fiscal measures, to help restore market confidence and promote financial stability. These events have focused attention on the role of deposit insurers and their role in the banking system. Recent literature reveals that during the GFC, deposit insurance maintained banking stability and successfully prevented customers doing ‘runs’ on the banks. The objective of this paper is to examine the deposit insurance system’s coverage limits and the impact on banking stability, in the context of a jurisdiction’s economic and institutional environment. Our model examines 61 jurisdictions in Asia and Europe with explicit deposit insurance systems, covering the pre- and post-GFC period between 2004 and 2014. We also examine subsets to investigate the effects of the region by comparing Asia and Europe, as well as a subset using the date of establishment of the deposit insurance system to understand if maturity matters. The results indicate that deposit insurance systems, and specifically deposit insurance coverage levels, have both positive and negative effects on banking stability. We find significant associations with certain economic and institutional factors; however, there are differences between the models we ran. These can be ascribed to regional factors and the date of when a deposit insurance system was established.

Banking market structure and efficiency: an assessment of the USA and Canada

PurposeThe study aims to analyze the changes in banking market structure and their impact on the bank efficiency.Design/methodology/approachThis study uses a one-stage stochastic frontier analysis (SFA) to compare the impact of the market structure and the GFC on the economic efficiency of the major banks in both countries.FindingsA significant negative impact of the GFC is observed on bank efficiency. Overall, Canadian banks posted better efficiency scores than their American counterparts. Additionally, cost-efficient banks are found to be more resilient to crises and more profit-efficient in the post-GFC period. The authors found that market power had a positive impact on the cost and profit efficiency of banks. Higher levels of equity, market power and concentration helped banks be more cost-efficient.Research limitations/implicationsOnly large banks are selected for study although it represents the majority stake of both banking sectors.Practical implicationsBanking regulators should include more measures to assess the banking market structure and performance.Originality/valueAs per the best knowledge of the authors, it is the first study to assess the change in banking market structure and efficiency of the US and Canadian banking sectors in the post-GFC period.

Cross-stock market spillovers through variance risk premiums and equity flows

We estimate variance risk premiums (VRPs) in stock markets of selected major advanced economies (AEs) and emerging market economies (EMEs) over 2007–2015, and decompose the VRP into variance-diffusive risk premium (DRP) and variance-jump risk premium (JRP). Daily VAR analysis reveals significant spillovers from US and developed Eurozone’s VRPs to the other economies’ VRPs, especially during the post-Global Financial Crisis (GFC) period. We also find that during the post-GFC period, shocks on the DRPs of the United States and the developed Eurozone have relatively strong and long-lived positive effects on other economies’ VRPs, whereas shocks on their JRPs have relatively weak and short-lived positive effects. In addition, we show that increases in the size of US VRP, DRP and JRP tend to significantly reduce weekly equity fund flows to all other AEs and some EMEs during the post-GFC period, while the impacts are limited during the GFC period. Finally, US DRP plays a more important role than US JRP in the determination of equity fund flows to other AEs during the post-GFC period. Such results indicate the possibility of equity fund flows working as a channel of cross-stock market VRP spillovers.