Real Economic Activity Research Articles

Post-pandemic Credit Allocation and Real Economic Activities: Evidence from Indian Firms

Post-pandemic Credit Allocation and Real Economic Activities: Evidence from Indian Firms

How Banks are Impacted by and Mediate the Economic Consequences of Natural Disasters and Climate Shocks: A Review

AbstractNatural hazard shocks (such as natural disasters, extreme weather events, and climate shocks) have significant negative consequences for real economic activity. The banking sector can mitigate (or exacerbate) some of these consequences. This paper reviews the recent empirical literature on how banks are affected by such shocks, and how banks mediate the economic consequences to households and the real economy. After conceptualizing the theoretical transmission channels between the real economy and the banking sector, the review proceeds in two steps. First, it synthesises the existing literature on the direct effects of natural hazard shocks on bank stability, bank profitability, and credit supply. Then, the critical role of banking in economic recovery is analysed, including research on spillovers into unaffected regions through the banking system. Negative direct effects of natural hazard shocks on banks can be significant but are often transitory. Banking systems in less developed countries appear more vulnerable and are less able to maintain credit supply under adverse conditions. Banks that are better capitalised and that have incentives to support affected economies contribute to economic resilience. The review identifies several avenues for future research and highlights specific features and trade-offs relevant to policymakers interested in enabling the banking system to contribute to sustained economic development in the face of worsening physical climate risks.

Geopolitical risks and energy uncertainty: Implications for global and domestic energy prices

This paper investigates the interaction between global geopolitical risks and global energy uncertainty by focusing on their implications for global and domestic energy prices of 157 countries. The empirical investigation is based on a structural vector autoregression model covering the monthly sample period between 1996 m1-2022m10, where global real economic activity is controlled for. The results show that a unit shock to global geopolitical risk (normalized to one standard deviation) results in about 1.13 units of an increase in global energy uncertainty (normalized to one standard deviation) in the long run (after two years), whereas the corresponding effects on global energy prices are statistically insignificant. In contrast, a unit shock to global energy uncertainty results in about 52 % (57 %) of a reduction in global energy prices (global economic activity), acting like negative global demand shocks. When statistically significant country-specific results are considered in the long run, a positive shock to the global geopolitical risk affects domestic energy prices positively (negatively) in 10 % (10 %) of oil producing countries, 32.1 % (19.7 %) of non-oil producing countries, 47.2 % (0 %) of advanced economies, 55 % (0 %) of euro area countries, 25 % (22.4 %) of emerging markets, and 22.2 % (26.7 %) of developing countries. In comparison, a positive shock to the global energy uncertainty affects domestic energy prices positively (negatively) in 5 % (40 %) of oil producing countries, 3.6 % (54 %) of non-oil producing countries, 0 % (61.1 %) of advanced economies, 0 % (50 %) of euro area countries, 3.9 % (56.6 %) of emerging markets, and 6.7 % (37.8 %) of developing countries. Important policy implications follow regarding the energy security of countries.

The art of paradigm maintenance: how the New Keynesian ‘Science of Monetary Policy’ tries to deal with the inflation of 2021–2023

The macroeconomic models used by major institutions including the Federal Reserve and the International Monetary Fund (IMF) failed to predict the inflation surge during 2021–2023. The output gap, the unemployment gap, the New Keynesian Phillips curve and inflation expectations did not give timely and relevant signals. The re-emergence of inflation thus threw the ‘science of monetary policy’ off the rails. Faced with the choice between changing their paradigm and proving that there is no need to do so, the ‘scientists of monetary policy’ got busy on the proof. As a result, a number of ad hoc epicycles have been added to the New Keynesian analytical core – with the help of which one can claim to be able to explain the sudden acceleration of inflation post factum. This paper critically reviews the theoretical and empirical merits of three recent tweaks to the New Keynesian core: using the vacancy ratio as the appropriate measure of real economic activity; hammering on the considerable risk of an imminent wage–price spiral; and the resurrection of the non-linear Phillips curve. The paper concludes by drawing out sobering lessons concerning the art of paradigm maintenance as practiced by the ‘scientists of monetary policy’.

Multilateral Tax Treaty Revision to Combat Tax Avoidance: On the Merits and Limits of BEPS’s Multilateral Instrument

Abstract Since 2015, more than 140 countries have cooperated in the OECD’s “Base Erosion and Profit Shifting” (BEPS) project to combat multinational tax avoidance. Several of the key actions, most importantly measures against tax-treaty shopping, require changes to double taxation treaties. The OECD designed a special instrument—the ‘multilateral instrument’ (MLI) - to allow for a swift implementation of BEPS-related tax treaty changes. In this paper, we show that MLI take-up is incomplete, we present (partly surprising) correlates of the take-up decision and develop a simple theoretical model to rationalize the observed take-up behavior. A key insight is that conduit countries, which are the beneficiaries of tax treaty shopping, can benefit from anti-treaty shopping laws as firms have incentives to scale-up real activity in conduit nations in order to be exempted from the new anti-treaty shopping rules. Empirical findings are consistent with these considerations: MLI adoption rates of conduit countries are high. Treaty shopping has, to date, not significantly dropped. And there is indeed indication that firms have scaled up their real economic activity in conduit nations. Overall, our findings reject that treaty shopping has been “killed” as envisaged by the OECD. JEL classification: F21, F23, F53, H25, H26, H32, H87, K34

The co-evolution of sustainable finance stakeholders under the EU taxonomy for sustainable activities: an exploratory study of Irish disclosure experiences

Purpose In pursuit of objectives, under the European Green Deal, to channel capital flows to sustainable activities, the EU Taxonomy offers clarity, labelling real economic activities as “sustainable”, based on technical screening criteria. This study of disclosure experiences aims to explore the role of co-evolutionary relationships in the Taxonomy’s effectiveness. Design/methodology/approach Co-evolution theory implies a dynamic interplay among sustainable finance stakeholders (SFSs), through adjustment to, impact on and operationalisation of the Taxonomy. Corporate disclosure experiences, including those of financial institutions and related SFS experiences, may reveal co-evolutionary processes. With significant Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), Irish SFSs provide contextual insight. Semi-structured interviews with a purposive sample of Irish SFSs capture inaugural corporate Taxonomy disclosure experiences. Findings A thematic analysis reveals six co-evolutionary processes that facilitate Taxonomy implementation in pursuit of policy objectives: [1] cross-functional reporting; [2] iterative pre-empting and addressing compliance issues; [3] regulation as a catalyst for co-evolution; [4] advanced capacity building; [5] stakeholder adaptation and [6] graduated use of ESG data. Implications for sustainability policy development and management are significant. Practical implications Whilst limited to just one EU jurisdiction, given limited prior empirical evidence for sustainable finance regulations from co-evolutionary perspectives, this study highlights a catalytic, yet precautionary role for co-evolution in their transformation effectiveness. As such, they must take account of their potential to stimulate co-evolution and to nurture it in pursuit of their policy objectives. Social implications The findings of this study add to a small, but growing body of academic literature on the Taxonomy Regulation, which suggests that a co-evolutionary lens is important for gaining a comprehensive understanding of its early-stage dynamics. From an implementation perspective, the qualitative data reveals actionable implications for regulators and policymakers, such as building capacity, better anticipation of outcomes and investment in data infrastructure. Originality/value Unlike existing analyses of disclosures, this study offers a co-evolutionary lens on Taxonomy contributions to sustainable development through qualitative accounts.

Rapid credit expansion and firm behavior: A case study from Türkiye

This study examines the impact of a sudden and remarkable credit expansion experienced in Türkiye during the first half of 2022 on firm behavior by utilizing a novel dataset containing the universe of all incorporated firms in Türkiye. The results of the combination of coarsened exact matching and difference-in-differences methodology show that, amid the credit expansion coupled with the deterioration in expectations of inflation and depreciation in local currency, the firms with higher credit usage tended to engage in alternative channels rather than undertaking real economic activities in short term, such as pulling-forward imports and input demand and taking position against local currency to gain financial profit more than those with less credit usage during the first half of 2022. While SMEs with higher credit usage increased their imports, domestic input purchases, foreign currency purchases, and foreign currency-denominated debt settlement before maturity, large firms increased their foreign currency purchases relative to their counterparts with less credit usage.

Total, quantile, and frequency risk transmission among metal commodities

AbstractThis study investigates the total, quantile, and frequency risk transmission among five widely traded metals namely copper, gold, lead, silver, and zinc using forecast error variance decomposition. The analysis spans from 1 January 2002, to 30 June 2023. Our findings reveal that the total connectedness index (TCI) changed over time, indicating sensitivity to time‐specific developments and major events during different periods. The TCI is influenced more by extreme positive or negative shocks, as the lower and upper quantile TCIs are higher compared to the medium quantile TCI. Furthermore, the short‐term TCIs exhibit higher values than the medium‐ and long‐term TCIs. These variations imply that the TCI is influenced by different types of shocks or mechanisms across different quantiles. Specifically, the short‐term TCIs are driven by global economic policy uncertainty, real global economic activity, and the geopolitical risk index (GPR). However, the medium‐ and long‐term TCIs are solely influenced by the GPR.

Real exchange rate and economic activity in Jamaica

This paper uses Bayesian VAR Analysis to empirically evaluate the relationship between the deviations of the real effective exchange rate from its equilibrium and Jamaica's GDP (and its components) over the period 1998 to 2021. The paper finds that an appreciation in the real exchange rate is generally associated with a fall in Jamaica's GDP, but the impact is small and statistically insignificant. However, this paper finds evidence that an appreciation hurts the trade balance of goods and the export of goods and services. The paper also finds that the tourism industry is resilient to losses in competitiveness, which may reflect the impact of factors that are not captured in our model.

The Effects of Shocks on the Real Economy in Romania. A Bayesian FAVAR Approach

Abstract The last five years have marked the global economy with a series of shocks, such as the COVID-19 pandemic, the war in Ukraine, supply chain bottlenecks, the surge in inflation, and the energy crisis, whose magnitude and duration were challenging to predict. Moreover, the impact of those shocks significantly affected the accuracy of macroeconomic forecasts. Thus, assessing the effects of the shocks became extremely important and conditioned by the econometric models that can capture a large amount of information. This paper proposes a Bayesian Factor-Augmented Vector Autoregressive Model (FAVAR) to assess the effects of the most prominent shocks that recently hit the real Romanian economy. We use a high-dimensional data set of quarterly indicators from 2005Q1 to 2023Q3, covering the real sector, price indexes, sentiment indicators and financial variables. Our main results suggest that tightening monetary policy shock decreases both the real economic activity and prices, while a supply shock produces a delayed negative and persistent effect on real economic activity and on the majority of the indicators introduced in the model. The results of the uncertainty shocks are characterized by wider confidence intervals and the effects are estimated to have a lower magnitude.

Stock return prediction with multiple measures using neural network models

In the field of empirical asset pricing, the challenges of high dimensionality, non-linear relationships, and interaction effects have led to the increasing popularity of machine learning (ML) methods. This study investigates the performance of ML methods when predicting different measures of stock returns from various factor models and investigates the feature importance and interaction effects among firm-specific variables and macroeconomic factors in this context. Our findings reveal that neural network models exhibit consistent performance across different stock return measures when they rely solely on firm-specific characteristic variables. However, the inclusion of macroeconomic factors from the financial market, real economic activities, and investor sentiment leads to substantial improvements in the model performance. Notably, the degree of improvement varies with the specific measures of stock returns under consideration. Furthermore, our analysis indicates that, after the inclusion of macroeconomic factors, there is a dissimilarity in model performance, variable importance, and interaction effects among macroeconomic and firm-specific variables, particularly concerning abnormal returns derived from the Fama–French three- and five-factor models compared with excess returns. This divergence is primarily attributed to the extent to which these factor models remove the variance associated with the macroeconomic variables. These findings collectively offer valuable insights into the efficacy of neural network models for stock return predictions and contribute to a deeper understanding of the intricate relationship between factor models, stock returns, and macroeconomic conditions in the domain of empirical asset pricing.

Assessing the baseline model of WTI oil and stock returns under financial volatility and spillover effects

Do financial volatility shocks matter for WTI oil and stock markets? They should since world economic activity responds to volatility. To investigate this question, we revisit two empirical frameworks widely used in the literature. Our baseline involves the standard identification of oil shocks in structural vector autoregressions (SVAR) with (world) oil supply, demand, and real oil prices. We then propose a global vector autoregressive (GVAR) model integrating 14 major world economies. We introduce the volatility measure (VIX), various stock markets, and compare two oil demand proxies: real economic activity (REA) based on commodity prices and world industrial production (WIP). The results of the impulse response analysis do not indicate major differences across models. However, when measuring the share of oil price variance explained by shocks to VIX (or to U.S. high-bond corporate yield) SVAR overestimates the influence of VIX. We find (world) demand shocks explain a larger part of the variance of oil and stock markets compared to supply shocks. In SVAR, new information coming from a one standard deviation shock to VIX is incorporated negatively and instantaneously on real oil prices: −1.6 for REA and −1.4 for WIP. In GVAR these are reduced slightly to −1.2 from VIX and to −0.6 if coming from corporate bond yield shocks. Our study highlights the sensitivity of econometric results to distinct approaches: one that identifies shocks and another that captures spillover effects.

Economic activity and the bank credit channel

We study empirically the effect of growth in real economic activity on the strength of the bank credit channel of monetary policy in the United States using quarterly commercial bank-level panel data between 1986 and 2018, and bank-firm matched administrative data on loan volumes and terms between 2012 and 2018. We find that monetary policy is significantly more effective through the bank credit channel in spurring activity during periods of low economic growth than in cooling the economy when growth is high. Our results also suggest that the channel operates through a broader range of loan categories and banks than previously documented, that it is stronger for business than household lending, and that for some of the major loan categories it only operates in a low economic growth environment.

Near-term forward rate spread and commodity index relationship with real economic activity in Brazil

This study investigates the relationship between Brazilian economic cycles and two key indicators: the international S&P GSCI commodity index and the near-term forward spread derived from the Brazilian interest rate term structure. We find that the forward spread serves as a robust leading indicator of economic downturns in Brazil, offering recession forecasts up to four quarters in advance. This underscores a link between yield curve steepness and recession likelihood in Brazil. However, we uncover distinct cyclical behaviors in Brazil's term structure that diverge from patterns in the United States. Furthermore, our research reveals the significant influence of commodity price fluctuations on Brazil's economic performance, underscoring a strong correlation between commodity markets and economic outcomes. Examining term structure and commodity prices together provides novel insights into monitoring emerging market cycles. These indicators can assist policymakers and improve early warning systems, especially in developing economies like Brazil.

Unpacking the Effects of Bank Credit Supply Shocks on Economic Activity

In this note, we examine the effects of bank credit supply shocks on real economic activity. First, we estimate how GDP and various aggregate demand sectors respond to such shocks. Second, based on the estimated responses, we compute how much those sectors contribute to the overall response of aggregate demand to bank credit supply shocks.

Greenhouse gas emissions and global real economic activities

We evaluate the impact mechanism between global real economic activities and greenhouse gas emissions (GHGs). First, we find a feedback relationship between global real economic activities and GHGs. However, we find that only reduced global real economic activities can significantly decrease GHGs, while both increases and decreases in GHGs have an impact on global real economic activities. Furthermore, the effects of global real economic activities on GHGs are long-lasting, while the reverse direction is relatively less persistent. Therefore, this paper may provide insights into sustainable economic development related to GHGs and real global economic activities.

Sovereign risk and bank lending: Evidence from 1999 Turkish Earthquake

We use an exogenous fiscal shock to identify the transmission of government risk to bank lending due to banks holding government bonds. We illustrate with a theoretical model that for banks with higher exposure to government bonds, a higher sovereign default risk implies lower bank net worth and less lending. Our empirical estimates confirm the model’s predictions. The exogenous change in sovereign default risk of Turkish government debt as a result of the 1999 Earthquake impacted banks whose balance sheets were exposed more to government bonds. The resulting lower bank net worth translates into a lower credit supply. We rule out alternative explanations. Our estimates suggest this channel can explain half of the decline in bank lending following the earthquake. This underlines the importance of the bank balance-sheet channel in transmitting a higher sovereign default risk to reduced real economic activity.

Asymmetric Effect of Oil Price on Economic Activity: Evidence from Lebanon Using NARDL Model

The aim of this paper is to investigate the impact of oil prices on the real economic activity of Lebanon, represented by the Gross Domestic Product (GDP) while controlling for inflation. For this purpose, this study employs a non-linear auto-regressive distributed lag model (NARDL) that enables to take into consideration the asymmetrical nature of the relationship between these two variables. The empirical findings confirm the asymmetric impact of changes in oil prices on economic activity. Notably, reductions in oil prices positively influence GDP in the long term and exert a more pronounced fluctuating effect compared to increases in oil prices, which are statistically insignificant. In other words, the country’s GDP, serving as a measure of the total value of finished goods and services, does not respond significantly to oil price rises but is influenced by oil price reductions. This empirical analysis focuses particularly on Lebanon, and time series data spanning from 1988 to 2021 are used to explore this relationship. This study guides Lebanon's policymakers, revealing the impact of declining oil prices on economic activity. It highlights growth opportunities amidst challenges like economic crises and corruption. Advocating for prudent policies and strategies, it offers a pathway for sustainable development.

Early Warning Systems for World Energy Crises

Different severe energy crisis episodes have occurred in the world in the last five decades. Energy crises lead to the deterioration of international relations, economic crises, changes in monetary systems, and social problems in countries. This paper aims to show the essential determinants of energy crises by developing a binary logit model that estimates the predictive ability of thirteen indicators in a sample that covers the period from January 1973 to December 2022. The empirical results show that the energy crises are mainly due to energy supply–demand imbalances (petroleum stocks, fossil energy production–consumption imbalances, and changes in energy imports by countries), energy investments (oil and natural gas drilling activities), economic and financial disruptions (inflation, dollar indices, and indices of global real economic activity) and geopolitical risks. Additionally, the model is capable of accurately predicting world energy crisis events with a 99% probability.

Exogenous oil supply shocks and global agricultural commodity prices: The role of biofuels

Using quarterly data ranging from 1986Q1 to 2019Q4, this paper identifies an oil supply shock that is exogenous to global real economic activity in the impact quarter based on the proxy structural vector autoregressions (SVAR). Then, the impact of this shock on global agricultural commodity prices is examined, with a particular focus on the role of biofuels in distributing the impact of this shock on global food commodity prices. We find that unfavorable exogenous oil supply shocks have a significant positive effect on global agricultural commodity prices. Moreover, the significant positive effect of the unfavorable exogenous oil supply shock on global agricultural commodity prices is primarily attributable to the impact of the shock on the prices of oils, meals and grains, which are all key biofuel feedstocks. We find evidence that unfavorable exogenous oil supply shocks affect global food commodity prices partly through the biofuel production channel. Finally, we uncover that exogenous oil supply shocks have played an important role in historical food commodity price movements, especially since the early 2000s. These findings are very useful for policymakers in understanding the relationship between oil supply shocks and global agricultural commodity price fluctuations.