Productivity Shocks Research Articles

Peculiarity of Behavior of Economic Agents under Cognitive Constraints in a Semi-Open New Keynesian Model

The aim of the paper is to analyze changes and peculiarities of behavior of economic agents with bounded rationality in the New Keynesian model, in which imported equipment and technology are one of the factors of production, and households consume only domestic products. The formation of output gap and inflation expectations by agents is based on stationary values of these variables and on extrapolation of the latest available data on inflation and the output gap. The weight shares of agents applying these rules change endogenously. Histograms of the frequency distribution of the degree of buoyancy and the impulse responses of monetary policy shocks and technology shocks to the variables under study show that a less open economy tends to go through an economic cycle with a smaller amplitude than a more rigid economy. Analyses of the trade-offs between the volatility of inflation and the output gap at different parameter values in the Taylor rule show their non-linear nature (in contrast to standard models with rational expectations). An important result obtained in this analysis is that the rational expectations hypothesis is more consistent with a closed economy than with an open one.

Agricultural Production Connectedness and Networks in Türkiye

The world’s population has been growing rapidly and since the 2006–2008 global food crisis, it has been questioned many times that how the world’s growing population will be fed properly. According to reputable international institutions, the world may be insufficient to supply enough food in the near future, and this fact may cause many economic, social, and government problems. In Türkiye, these problems will be realized more harshly than in peer countries for some reasons. Türkiye has one of the highest population growth rates in the world, while it hosts the highest number of refugees in the world. In addition, Türkiye’s agriculture sector has been experiencing a harsh downfall recently and the country has been dependent on importing food and agricultural commodities. Therefore, in this paper, I investigate the connectedness and networks of agricultural production in Türkiye by using the connectedness approach of Diebold and Yilmaz (2012, 2014), which is based on the forecast error variance decomposition methodology of generalized vector autoregressive models. I use Türkiye’s most produced agricultural commodity data, which are barley, wheat, rye, paddy, lentil, chickpea, and oat. The material consists of annual production data from 1938 to 2019. According to the analysis results, Türkiye’s agricultural production has been highly connected. Our findings show that production shocks arising from wheat and barley have spilled over to other commodities. Agricultural production networks and pairwise spillovers also exhibit a similar result that most of the commodities are highly interconnected to wheat and barley production. Besides, pairwise connectedness results show that there are some strong and weak connectivity relations, and these can be used for the decision-making process, risk aversion, and risk-seeking purposes. Our findings have important implications for policymaking for institutions, diversification, and risk management for producers, suppliers, and traders.

FinTech matters in sustainable finance: Does it redistribute the supply of financial services?

FinTech brings new technology, and thus promises to improve financial services of sustainable finance to brown firms. We study the mixed impacts of FinTech and sustainable finance on China’s publicly listed firms. The regression results show that FinTech makes sustainable finance work, then brown firms obtain more bank credits with lower interest payable, and add expenditure in environmental protection. The mixed impact is more notable when brown firms face higher banking competition; it implies that in the field of sustainable finance, substitution between FinTech and banks is economically small. We find at least two technology shocks to brown firms, of applying FinTech in sustainable finance: (a) FinTech helps banks identify brown firms’ greenwashing behaviors, and thus reduces the supply of financial services to these firms. (b) FinTech helps brown firms with no bank connection obtain more supply of financial services. These findings rationalize the use of FinTech for effective sustainable finance, especially the use for redistributing the improper supply of financial services.

Accounting Uniformity, Comparability, and Resource Allocation Efficiency

ABSTRACT Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms’ choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto-dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a microfoundation for accounting measurement regulation. JEL Classifications: D02; D61; D83; H11; M40; M41; M48.

Productivity Shock and Labour Input: Evidence from Correlated Unobserved Component Model

This note assesses the relationship between labour productivity and employment in the framework of the unobserved component model as well as the vector autoregressive model. In the case of the organized/formal manufacturing sector in India, the transitory increase in productivity is seen to reduce the man-days in the short run, though it is not statistically significant. Permanent shock to productivity decreases labour inputs permanently, and vice versa and their association is also statistically significant. Incentivizing the firms to expand their activities, diversify production and process secondary products may help restore employment in the face of a permanent productivity shock. JEL Classification: C11, C32, E32

Economic impacts of climate change on EU agriculture: will the farmers benefit from global climate change?

This paper analyses how climate change might impact EU agricultural markets by mid-century, considering a large ensemble of climate change projections from different models, market adjustments and trade feedbacks. Applying consistent climate change driven productivity shocks to a global multi-commodity agricultural market model we show that the negative direct effects from climate change on crop production in the EU could be offset by market and trade adjustments. The simulations reveal that climate change has heterogeneous impacts across regions. EU farming sector, in particular, might actually benefit from climate change as the impacts on agricultural productivity are expected to be more severe in important non-EU production regions such as US, Russia and Ukraine, depending on the crop. Higher producer prices for important crops such as wheat, barley, grain maize, rice and soybeans, lead to an increase in EU production and exports. For instance EU wheat production could increase by 13% and exports by 28%, with 19% higher farm incomes on average than in a business-as-usual situation. Our study has several limitations. In particular, we do not consider CO2 fertilization effects and direct effect from climate change on livestock sector, climate variability and extreme weather effects. Notwithstanding, our findings highlight the heterogeneity of climate change impacts across regions, specifically Northern versus Southern Europe, and the importance of market and trade adjustments as economic adaptation mechanisms to climate change.

AN ASSESSMENT ON THE MONETARY BUSINESS CYCLE THEORY

In recent years, considerable attention has given to analyzing the business cycle in terms of money. Many researchers have developed dynamic stochastic general equilibrium models that generate business cycle facts and guide for making monetary policy decisions. The aim of this study is to investigate how the persistence of total factor productivity (TFP) and money growth shocks drive the business cycles within an economy. To achieve this aim, we employ a monetary business cycle model with a cash-in-advance constraint, as in Cooley and Hansen (1995). Our results indicate that the volatility of macroeconomic variables is higher when the persistence of TFP shocks is greater compared to that of money growth shocks. Furthermore, TFP shocks seem to have a more significant role in driving variability within the models compared to money growth shocks. This is demonstrated by the higher percentage of variance decomposition attributed to TFP shocks, except in the case of consumption variability.

Investigating and forecasting the impact of crop production shocks on global commodity prices

In this study, we investigate and forecast the impact of crop production shocks on the global prices of three major international agricultural commodities: maize, soybean, and cocoa. We perform a thorough assessment of the forecasting performances of five econometric and machine learning models using 60 years of data. First, we train the models on production and price data to forecast the monthly price variations for each crop separately considering different time horizons. Next, we implement a cross-validation procedure to identify the models with the most accurate forecasting ability for each crop. After choosing the best forecaster, we identify the most influential producing areas using several local and global model-agnostic interpretation tools. Our findings indicate significant differences among commodities in terms of prediction accuracy, with cocoa exhibiting a higher level of prediction error compared to less volatile markets like maize and soybean. Our results reveal a significant influence of Northern America’s maize and soybean production on the global prices of these commodities. The effects of production on prices are asymmetrical: small decreases in US production lead to substantial price increases, while small increases in production do not systematically decrease prices. In contrast, cocoa price variations are influenced by production coming from several regions, not from a single one.

Research on the Impact of Industrial Digitalization on High-Quality Economic Development: Evidence from China

This paper presents a New Keynesian dynamic stochastic general equilibrium model with price stickiness, employing macro-quarterly data and Bayesian estimation for parameter estimation. The study dissects the impact of industrial digitalization into three key components: total factor productivity shock, investment marginal efficiency shock, and capital-to-labor substitution shock. The paper then analyzes the mechanism through which industrial digitalization influences the high-quality development of the economy using impulse response analysis and historical variance decomposition. The result shows that: In terms of economic growth, all three types of shocks resulting from industrial digitalization contribute to output expansion, with the investment marginal efficiency shock rapidly boosting output in the short term. However, the technology shock has the most noticeable long-term effect on output growth. In the labor market, the investment marginal efficiency shock positively impacts employment and wages. The effects of the technology shock and capital-to-labor substitution shock on employment and wages first show suppression before enhancement. In the commodity market, the three shocks exert more pronounced effects in the medium and long term, bolstering investment and consumption to varying degrees. In light of these findings, policy recommendations include promoting the development of digital infrastructure, implementing proactive employment policies, offering robust industrial support for the digitalization of traditional enterprises, and fostering a favorable market environment.

Fiscal adjustments and TFP dynamics: addressing reverse causality within a heterogeneous panel framework with global shocks

PurposeThe purpose of this study is to provide new insights into the relationship between fiscal policy and total factor productivity (TFP) while accounting for several economic and econometric issues of the phenomenon like non-stationarity, fiscal feedback effects, persistence in productivity, country heterogeneity and unobserved global shocks and local spillovers affecting heterogeneously the countries in the sample.Design/methodology/approachThe paper is empirical. It builds an Error Correction Model (ECM) specification within a dynamic heterogeneous framework with common correlated effects and models both reverse causality and feedback effects.FindingsThe results of this study highlight some new findings relative to the existing related literature. The outcomes suggest some relevant evidence at both the academic and policy levels: (1) the causal effects going from fiscal deficit/surplus to TFP are heterogeneous across countries; (2) the effects depend on the time horizon considered; (3) the long-run dynamics of TFP are positively impacted by improvements in fiscal budget, but only if the austerity measures do not exert slowdowns in aggregate growth.Originality/valueThe main originality of this study is methodological, with possible extensions to related phenomena. Relative to the existing literature, the gains of this study rely on the way econometric techniques, recently proposed in the literature, are adapted to the economic relationship of interest. The endogeneity due to the existence of reverse causality is modelled without implying relevant performance losses of the models. Moreover, this is the first article that questions whether the effects of fiscal budget on productivity depend on the impact of the former on aggregate output growth, thus emphasising the importance of the quality of fiscal adjustments.

Networks in Japanese regional agro-food economies: an empirical exploration of the network linkage model

Network linkage is important in evaluating macroeconomic performance since input‒output networks across industries are asymmetric and respond differently to external shocks. While most studies implicitly assume elastic substitution between intermediates and factors using Cobb‒Douglas models, this is often improbable since the input‒output structure may change due to the shocks, which would be observed as nonlinearities in macroeconomic impacts on sectoral shocks. Additionally, considering regionally located sectors such as the agriculture and food-processing industries, the propagation of sectoral shocks can be interregionally correlated. This study employs the network linkage model to empirically verify the interaction of agro-food sectoral shocks in regional outcomes. By comparing the network effects influencing the national economy and regional economy, the superiority of considering intraregional networks among agro-food sectors is empirically verified; thus, productivity shocks arising in these industries propagate more intensively within their own region.

Labor market institutions and technology-induced labor adjustment along the extensive and intensive margins

What is the composition of total hours response to a technology shock in countries with different labor market institutions in terms of extensive and intensive margin movements? To answer this question, I identify technology shocks using structural vector autoregressions (SVARs) and decompose the responses of hours into adjustments along the extensive and intensive margins. I compare the adjustments along the two margins between groups of countries with strict and flexible labor market institutions. I find that both margins play a large role in accommodating technology shocks, with adjustments along the intensive margin being more important. Furthermore, countries with flexible labor market institutions display a larger drop in employment, whereas the results for the intensive margin are mixed. Finally, the cross-country differences in fluctuations along the two margins can be linked to the strictness of institutions that target quantity and price adjustments in the labor market.

Secular stagnation: a Classical–Marxian view

We study a model of secular stagnation, income and wealth distribution, and employment in the Classical–Marxian (CM) tradition, with the purpose of drawing a contrast with established Neoclassical accounts of the topic (Piketty 2014, Gordon 2015). In these explanations, which assume full employment of labor at all times, an exogenous reduction in the growth rate g increases the difference with the endogenous rate of return to capital r. The capital–income ratio rises and, if the elasticity of substitution is above one, the wage share falls. Our explanation does not presuppose full employment, and features a crucial tension between profit-driven capital accumulation and wage-driven labor-augmenting technical change: both these features are defining for CM economics and have been emphasized in recent heterodox macro literature. Institutional or technological shocks that lower the wage share initially foster capital accumulation – which is profit-driven – and increase wealth inequality. However, the effect on long-run growth is negative, because a reduction in the wage share lessens the incentives by firms to introduce labor-saving innovation, which is wage-driven. The capital–income ratio must rise in order to restore balanced growth and stabilize employment in the long run; and the increase in wealth inequality is permanent. The ultimate effect on long-run employment depends on the relative strength of the response of technical change versus real wage growth to labor market institutions: we identify a simple condition that delivers either a wage-led or a profit-led long-run employment regime. We then test the model using time-series data for the US (1960–2019): impulse responses from vector error-correction model (VECM) estimators lend support to the main predictions of our model, and point to the employment–population ratio being wage-led.

The effect of price support policies under productivity shocks: evidence from an economywide model

The effect of price support policies under productivity shocks: evidence from an economywide model

Supply or demand? Policy makers’ confusion in the presence of hysteresis

Policy makers need to separate between temporary demand-driven shocks and permanent shocks in order to design optimal aggregate demand policies. In this paper we study the case of a central bank that ignores the presence of hysteresis when identifying shocks. By assuming that all low-frequency output fluctuations are driven by permanent technology shocks, monetary policy is not aggressive enough in response to demand shocks. In addition, we show that errors in assessing the state of the economy can be self-perpetuating if seen through the lens of the mistaken views of the policy maker. We show that a central bank that mistakes a demand shock for a supply shock, will produce permanent effects on output through their suboptimal policies. Ex-post, the central bank will see an economy that resembles what they had forecast when designing their policies. The shock is indeed persistent and this persistence validates their assumption that the shock was a supply-driven one. The interaction between forecasts, policies and hysteresis creates the dynamics of self-perpetuating errors that is the focus of this paper.

Employment and technology: Creative creation or creative destruction? An asymmetric analysis

AbstractTheoretical predictions of the effect of technological change on employment are ambiguous and depend on the extent to which new technology is embodied in new jobs. This paper separates positive and negative shocks and examines the extent to which technological shocks have an asymmetric effect on unemployment in nine European countries by using hidden cointegration analysis within a likelihood‐based panel framework. The findings are consistent with the hypothesis that technological changes have had an unequal effect on unemployment because negative and positive shocks have different impacts on unemployment in terms of sign and size. It is interesting to note that women appear to be the group most negatively impacted by technological shocks. The estimates also show that the results are inconsistent because technological advancement has resulted in ‘creative destruction’ in four countries while ‘creative creation’ has occurred in five of them. It is worth mentioning that the methodological framework utilized in this paper can be a useful tool for predicting the behaviour of technological shocks. Policy implications are discussed.

Factors affecting risk attitudes of small scale poultry farmers in Kogi State, Nigeria

Small-scale farmers are risk averse in order to avoid any discomfort in their livelihoods. Hence, this study analyzed the risk attitudes and their determinants among poultry farmers in Kogi State, Nigeria. A multi stage sampling technique was used to select a total of 192 respondents in the study area on which semi-structured questionnaires were administered to extract relevant information. Data collected were analyzed using both descriptive and inferential statistics such as safety first model, ordered logit regression as well as Ordinary Least Square (OLS) regression model. The results showed that the major risks associated with poultry production were disease outbreak, lack of medication and lack of vaccination health programmes. Majority (57%) were risk averse with aggregate frequency score of 109. Furthermore, the factors influencing farmers’ risk attitude in poultry production were educational level, primary occupation, cooperative membership, marital status, labour in man days and investments. It was therefore recommended that poultry farmers need to strengthen their membership of cooperative societies so that they can have more access to veterinary services and risk sharing opportunities. The farmers need to be involved in other income generating enterprises in order to cushion the effect of production shocks inherent in poultry production.

Labor market dynamics with sorting

I study a dynamic search-matching model with two-sided heterogeneity, a production complementarity that induces labor market sorting, and aggregate shocks. In response to a positive productivity shock, incentives to sort increase disproportionately. Firms respond by posting additional vacancies, and the strength of the response is increasing in firm productivity. The distribution of unemployment worker types adjusts slowly, which amplifies job creation in the short run. In the long run, falling unemployment curtails the firms' vacancy posting. The model closely matches time-series moments from U.S. labor market data and produces realistic degrees of wage dispersion and labor market sorting.

Technology diffusion and international business cycles

This paper shows that the cross-country diffusion of innovations forms a critical channel through which macroeconomic shocks are transmitted across economies. This inference is obtained from a two country, medium scale DSGE model that includes an endogenous growth mechanism. R&D activity and innovation are the main components of this mechanism and they are introduced through a labor-augmenting technology. The model features international diffusion of technologies as the innovations by a firm are not only adopted by other firms within a country but also by those in the other country. Estimating the model with US and Euro Area data, I observe that foreign shocks contribute a high share to the macroeconomic volatility in each economy. By contrast, foreign shocks make a negligible contribution when the model is estimated after shutting down technology diffusion. The results, more generally, show that it is not technology shocks, nor any other shock, but the transmission of shocks through the diffusion of new technologies that is the key driver of international business cycles.

Output measurement and technological shocks in business cycles

ABSTRACT Is the importance of technology shocks in accounting for the fluctuations in output and hours sensitive to the measure of output? Using a vector autoregression, we empirically investigate the contribution of technological shocks to economic fluctuations when output is defined in consumption units, as commonly used in many macroeconomic models, and when output is tabulated according to the Divisia index in the U.S. National Income and Product Accounts (NIPAs). Based on a standard neoclassical growth framework that allows for a mapping of theory into any desired measure of output, we establish that the same restrictions may be used to identify technology shocks in a vector autoregression model regardless of the measure of output. However, our estimation reveals that while the combination of both investment-specific technology shocks and neutral technology shocks accounts for a large portion of the business cycle variability of hours and output, the choice of the measure of output via the use of the associated deflator greatly affects the amplification of the shocks in the responses and the variability of the responses in output and hours.