Real Economic Activity Research Articles

Are cryptocurrencies a future safe haven for investors? The case of Bitcoin

The paper seeks to determine whether Bitcoin behaves differently from forex markets and Gold, and whether it offers any diversification, hedging, or safe-haven potential. A Markov regime-switching regression model is employed to determine the relationship between Bitcoin, the real economic activity, foreign exchange markets, financial markets, Energy, and Gold. The results indicate that, unlike USD/EUR and Gold, besides other variables, Bitcoin exhibits significant deviations in terms of its association with other financial and economic variables. Bitcoin appears to be strikingly positively associated with equity markets in both regimes. This may limit its potential to either act as a hedge or a safe-haven for US Equity markets. Bitcoin also deviates considerably from Gold and USD/EUR as it is not affected by the same set of variables as Gold or USD/EUR are under either regime. Moreover, while Gold appears to offer considerably weak safe-haven properties, particularly against equity, Bitcoin fails to be a safe-haven for any of the assets under study. The results, however, indicate that the properties of Bitcoin may range between a diversifier and a hedge, however, such potential of Bitcoin must be viewed with caution owing to the large volatility exhibited by Bitcoin.

The influence from a demand perspective with real economic activity: China versus the United States in world oil markets

AbstractIn this paper, we provide direct evidence for an increasingly critical role of China in the world oil markets. Specifically, our empirical results confirm that the influence of China's oil demand on the oil price of the world has increased over time and surpassed that of the United States. The contribution of demand perspective from China are formally quantified by three key variables of world oil market, which are world oil production, real economic activity and the real price of crude oil. The impact of oil demand from China is used to compared with those from other oil markets, including shocks from the United States. We also construct suitable proxies that reflect real economic activity from these economies, and identify them via a structural vector autoregressive model to disentangle the influence of oil demand from China, the United States and the rest of the world. Our results confirm the finding of recent research, which is the increasing demand for oil from developing countries has become a key driver of the price of oil.

Bubbly firm dynamics and aggregate fluctuations

The transmission channel of asset bubbles is studied in a heterogeneous firm model with endogenous entry and exit. We highlight the effects of asset bubbles along the extensive margin: the aggregate bubble can boost real economic activities by affecting firms’ entry and exit decisions. Moreover, the model predicts the selection effect of bubbles: bubbly firms—firms with asset bubbles—are less productive than bubble-less firms. Finally, we provide empirical evidence that supports bubbles’ effects along the extensive margin.

Geopolitical risk shocks and the Brazilian economy

ABSTRACT This paper investigates the impacts of international geopolitical risk shocks (GPR) on the Brazilian economy. The dynamic relation between Brazil and GPR is modelled using a Bayesian vector autoregressive model that accounts for large economic shocks with heavy tails and stochastic volatility. The study analyses quarterly data from Brazil, as well as the indices that account for GPR related to the US, Russia, and a global GPR index. The results indicate that real economic activity reacts more intensely to Russian risk than to global or US risk, whereas the responses of prices and financial indicators appear more sensitive to global risk.

Article: Revenue Effects of the Global Minimum Tax Under Pillar Two

In October 2021, 137 countries and jurisdictions agreed to implement a major reform of the international corporate tax system, i.e., a global minimum tax of 15% on the profits of large multinational companies. This article presents simulations of the revenue effects of the global minimum tax. Two possible scenarios are considered regarding who collects the minimum tax: The country in which the headquarters are located based on the income inclusion rule (IIR) or the host country of foreign affiliates as laid out under the qualified domestic minimum top-up tax (QDMTT). The Organization for Economic Cooperation and Development’s (OECD’s) tabulated country-by-country report (CbCR) statistics are complemented with data by Tørslov, Wier, and Zucman (2020). Based on a sample of eighty-three parent countries, it is estimated that headquarters countries could collect a total revenue of EUR 179 billion globally. The EU Member States could receive EUR 67 billion from a 15% minimum top-up tax. Carve-outs, provisions that decrease the tax base for real economic activity, reduce the potential tax revenues by approximately 14% to 22% over the entire sample. Under the current agreement, the European Union can expect a total tax revenue of EUR 55 billion yearly. The analysis accentuates how the distribution of revenues varies depending on which country has the priority to collect. Under the IIR in which the headquarters country collects the top-up tax, a country receives more revenues when it hosts more headquartered multinationals. With qualified domestic top-up taxes that give the host country of the foreign affiliate the priority to collect the top-up tax, low-tax jurisdictions that have attracted affiliates of many multinationals could be among the main beneficiaries of the reform. Static estimates that take the distribution of profits and taxes paid as given, are presented. Thereafter possible behavioural effects that may affect the estimates are discussed. International taxation, tax deficit, global minimum tax

Systemic risk and real economic activity: A South African insurance stress index of systemic risk

This study investigates the link between systemic risk in the South African insurance sector real economic activity in South Africa. To this end, we use six systemic risk measures, the Conditional Value at Risk (CoVaR), the Marginal Conditional Value at Risk (ΔCoVaR), the Comovement and Interconnectedness of the South African insurance sector (Eigen), the Dynamic Mixture Copula Marginal Expected Shortfall (DMC-MES), the Average Conditional Volatility (Ave-vol), and the South African Volatility Index (SAVI). We first evaluate the significance of each measure by assessing its ability to forecast future economic downturns in South Africa. We find that only two systemic risk measures possess the ability to predict future economic downturns in South Africa. We then use principal component quantile regression analysis to aggregate these measures into a composite stress index of systemic risk for the South African insurance sector and assess the ability of the proposed index to predict future economic downturns in South Africa. Our results reveal that the proposed index is a good predictor of future economic downturns in South Africa. Thus, our results suggest that regulators and risk managers must develop an analysis of systemic risk in the insurance sector with particular attention to its effects on real economic activity. In addition, our index can potentially be used as an instrument to monitor and mitigate systemic risk in the insurance sector in order to ensure the stability of the financial system and the economy in South Africa.

Analysis of The Long-Term Links Between the Money Supply and The Consumer Price Index of The Republic of Azerbaijan

Purpose of the study.Monetary policy is one of the most effective tools of the state under the control of the central bank. It allows you to influence macroeconomic components, such as the amount of money supply, activity in the credit market and the exchange rate of the national currency. Such actions lead to an increase in the money supply and the speed of its turnover, ensuring the availability of loans. Economic growth is being stimulated, but there are also adverse consequences - inflation is accelerating. The central bank uses monetary policy more frequently to bring about the desired level of change in real economic activity. These changes significantly affect the stock market. Economic theory uses the relationship between the money supply and the consumer price index. An analysis of the impact of the money supply on the consumer price index is necessary to select the most reliable type of monetary policy in the economy, to ensure macroeconomic stability or to stimulate economic growth. The money supply not only denotes and shows the level of money in various types and forms, but is also an important indicator on which price increases, inflation, credit policy, etc. depend. The dynamics of the money supply determines the dynamics of prices. The accumulation of excess money supply in the country’s economy leads to the depreciation of the national currency. The purpose of the study is to analyze the long-term relationship between the money supply and the consumer price index of the Republic of Azerbaijan.Materials and methods.In the article to analyze the long-term links between monetary aggregates M1, M2 and the consumer price index of the Republic of Azerbaijan based on quarterly data for 2005-2018, a long-term equilibrium state model and a short-term error correction model were designed. With the help of cointegration analysis and a vector model, the long-term and short-term aspects of the links between the growth of the money supply and the increase in the price level are investigated. For the regression analysis of these models, the EViews 8 application package was used.Results. Using the various methods showed that the dynamics of M1 and M2 monetary aggregates determine the growth of the consumer price index in Azerbaijan both in the long-term and in the short-term periods.Conclusion.The analysis allows us correctly approaching the problem of modelling the inflation level and to obtain a statistically acceptable and stable model with good predictive characteristics. The fact that there is a connection in the opposite direction has been confirmed. The use of various complementary methods showed that the dynamics of monetary aggregates M1 and M2 determines the growth of the consumer price index in Azerbaijan both in the long and short term.

Financial trading versus entrepreneurship: Competition for talent and negative feedback effects

Higher market efficiency due to informed financial trading is typically considered to have positive feedback effects on the real economy. We extend the seminal Grossman-Stiglitz (1980) model to highlight an important negative feedback effect from trading to entrepreneurial activity: information revelation via prices leads to a clustering of risk at entrepreneurs. This distorts agents’ occupational choice between financial trading and entrepreneurship, discouraging real economic activity. This negative feedback effect provides explanations for excessive financial trading and multiplicity of equilibria.

The inverted leading indicator property and redistribution effect of the interest rate

The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki–Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling belief shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki–Moore type models with unique equilibrium.

Stock market performance: Reaction to interest rates and inflation rates

This paper investigates the wealth effects of the consumer price index, interest rate, domestic credit and real economic activity on the Amman Stock Exchange performance. Over the period 1991–2020 using the autoregressive distributed lag (ARDL) bounds test. While the interest rate is a powerful monetary tool to fight inflation and recession, it can be detrimental to investors. The target variables, consumer price index (CPI) and interest rate (IDR), are both highly significant with the correct signs. An increase of 1 percent in CPI and IDR leads to a fall in stock prices by 1.6 percent and 5 percent, respectively. While the central bank is targeting inflation by raising interest rates, its actions reflect negatively on the stock market. The short-run model confirms the causality from the independent variables to the dependent variable. Moreover, the error correction term (ECT) is very high and significant at the 1 percent level amounting to 83.3 percent, which confirms the evidence of the long-run relationship. Monetary objectives are really important, but financial stability is also important.

Oil price shocks and U.S. unemployment rate: a robustness check

ABSTRACT This study investigates the sensitivity of the responses of the real price of oil and the U.S. unemployment rate to several real economic activity (REA) measures proposed in the literature. It then estimates the responses of the above macroeconomic variables to a set of alternative exogenous oil supply shock series driven by different modelling strategies. While the results are qualitatively robust across the REA measures, they are sensitive to the exogenous oil supply shock series selected.

Interdependent capital structure choices and the macroeconomy

This study shows that capital structure choices of US corporations are interdependent across time. We follow a two-step estimation approach. First, using a large cross-section of firms we estimate year-by-year average capital structure choices, i.e., the average firm’s percentage of new funding that is secured through debt, its term composition, and the percentage of new equity represented by retained earnings. Second, these time series are included in a Factor Augmented Vector Autoregressive model in which three factors representing real economic activity, expected future funding conditions, and prices, are included. We test for the interdependence between optimal capital structure decisions and for the influence exerted by macroeconomic conditions on these decisions. Results show there is a hierarchical order in which firms make capital structure decisions. They first decide on the share of debt out of total new funding they will hire. Conditional on this they decide on the term of their debt and on their earnings retention policy. Of outmost importance, macroeconomic factors are key for making capital structure decisions.

MONETARY POLICY: COMPARISON OF MASUDUL ALAM CHOUDHURY ANDMILTON FRIEDMANECONOMIC THOUGHT

This study aims; 1) to describe Masudul Alam Choudhury and Milton Friedman version of monetary policy, 2) to describe the comparison of Masudul Alam Choudhury and Milton Friedman thoughts on monetary policy, 3) to describe the relevance of Masudul Alam Choudhury and Milton Friedman version of monetary policy to monetary policy in Indonesia. The research method used is a qualitative method with a literature review type. The results showed that; 1) Choudhury put forward the endogenous theory of money in Islam, where the central bank as the monetary authority only facilitates the circulation of the money supply volume so that the amount is accordance with actual spending and not spending demand expectation, 2) Friedman argues that money only affects inflation and does not affect economic growth, therefore monetary policy must be directed only affects at controlling inflation and not directed at influencing real economic activity, 3) The relevance of Choudhury and Friedman economic thinking regarding monetary policy on monetary policy in Indonesia can be seen from the implementation monetary policy implemented by Bank Indonesia.

International Fund Allocation under Economic Policy Uncertainty Shock

Abstract This paper focuses on the impact of economic policy uncertainty on international asset allocation and international capital flows. Our results show that economic policy uncertainty shocks have a negative impact on the international asset allocation, which can be explained from the real economic activity channel and the expectation channel. We also explore a full fledge of country level heterogeneities about the economic policy uncertainty shocks on international asset allocation. Specifically, good institutional quality, transparent information, good information access to the international financial market and bilateral informational link help to alleviate the negative effect that economic policy uncertainty shock does to asset allocation. And a healthy public and external sector also help to alleviate the negative effect. While the importance of government in the economy amplifies the negative effect of economic policy uncertainty shocks to asset allocation. JEL classification numbers: E44, G11, G15. Keywords: Economic policy uncertainty, Global fund allocation, Institutional quality, Global imbalance.

Inflation Dynamics in the Czech Republic: New Evidence on the Cost Based Hybrid New Keynesian Phillips Curve

New Keynesian form of the Phillips Curve assumes a shortterm trade-off between inflation and real economic activity, either in unit labour cost or output gap specification. Extending the New Keynesian Phillips Curve (NKPC) with a backward-looking price setting, our aim is to examine the impact of the inflation expectations, lagged inflation, unit labour cost, import prices and real effective exchange rate on the inflation dynamics in the Czech Republic between 2000M1 and 2020M12. Dealing with non-stationary and cointegrated time series, we opted for an Error Correction Model (ECM) and an Autoregressive Distributed Lag (ARDL) model with the variables integrated of order I(1). ARDL model in differences was also compared with an ARDL model in levels. The main findings of our analysis can be summarized as follows. Firstly, our analysis indicates that the ARDL model using non-stationary time series generates spurious regression results. Secondly, the results from the ECM model and the ARDL model with first order differencing find the inflation expectations and unit labour cost statistically significant, confirming the existence of a small open economy NKPC for the Czech Republic. Thirdly, even though the backward-looking inflation setting represents a cornerstone of the hybrid NKPC, we have found no evidence for lagged inflation to have an impact on the inflation dynamics in the Czech Republic between 2000M1 and 2020M12. We thereby reject the hybrid version of the NKPC. Lastly, in spite of the Czech Republic representing a small open economy, we observed weak statistical evidence suggesting that external factors (exchange rate, import prices) influence the inflation dynamics in the Czech Republic.

The limited power of monetary policy in a pandemic

We embed an extension of the canonical epidemiology model in a New Keynesian model and analyze the role of monetary policy as a virus spreads and triggers a sizable recession. In our framework, consumption is less sensitive to real interest changes in a pandemic than in normal times because individuals have to balance the benefits of taking advantage of intertemporal substitution opportunities with the risk of becoming sick. Accommodative monetary policies such as forward guidance result in large increases in inflation but have only limited effects on real economic activity as long as the risk of infection is large. The optimal design of monetary policy hinges on how other tools used to limit virus spread, such as lockdowns, are deployed. If the lockdown policy is conducted optimally, monetary policy should focus on keeping inflation on target. However, if the lockdown policy is not optimal, the central bank faces a trade-off between its objective of stabilizing inflation and the necessity to minimize the inefficiencies associated with virus spread.

Turbulence in start-ups: short-term effect of COVID-19 lockdown on creation of new firms and its capital

PurposeBusiness creation is an important measure of real economic activity as it shows the dynamics with which new firms are born, create jobs, move their capital, innovate and compete with old firms. In this sense, this paper aims to analyze the short-term impact of the lockdown policies implemented to stop the spread of the COVID-19 on the creation of new formal firms in Ecuador.Design/methodology/approachThis paper uses a regression discontinuity in time (RDiT) design jointly with official administrative real-time data. This data is collected by the supervisory and regulatory institution of formal companies in Ecuador. The authors use real-time data from January 13, 2020, to May 15, 2020. This period allows to use the President’s order of effective lockdown on March 16, 2020, as the exogenous event. This gives 43 working days on each side of the cutoff date on the baseline model.FindingsThe authors find: an overall large drop in the creation of new formal firms (−73%) and a decrease in the total amount of initial capital coming from the new formal firms (−40%). Additionally, the results suggest that the negative impact of the COVID-19 lockdown on the creation of new formal firms seems not to decrease in the short term. The main conclusion is that lockdown policies have a negative impact on firm creation, a result that is of high policy relevance and can be a tool to design business attraction policies.Research limitations/implicationsThe analysis is carried out in a short period because on May18, 2020, a new policy was applied in Ecuador that allowed firms to be created more quickly, with 1 USD of capital, and 1 shareholder, among other benefits, and this may affect the outcomes analyzed in this document, so extending the analysis of the impact of the lockdown to a longer period could result in biased results due to this policy. Additionally, studying daily sales would be of the utmost importance; however, these data are not found in the database of the supervising institution.Practical implicationsThis study contributes to the empirical literature and the policy debate in various aspects. First, it is important to generate facilities for the creation of new formal firms, from the reduction of days it takes to create one (using technology as a support in this matter) to the decrease of the minimum capital to formalize a company. Second, improve the business conditions of the new formal firms that were born during the pandemic, but also that these conditions create stimulus for the creation of new companies. Third, the authors show that induced-lockdown policies have a negative impact on the creation of new formal firms and the total amount of initial capital from new formal firms; this effect could be a full-blown recession if governments do not apply mechanisms to revert this situation that could be a drag on the economy.Originality/valueThis paper opens the debate on the effects of the COVID-19 lockdown on the creation of new formal firms; therefore, future research could study the impact in a broader time window to analyze medium and long-run effects, but also in different economic sectors and in the effects on firm bankruptcy, which added to an analysis of job loss, will show a total effect of damage in the economy.

Examining QE’s bang for the Buck: Does Quantitative easing reduce credit and liquidity risks and stimulate real economic activity?

This paper investigates the ECB’s Corporate Sector Purchase Programme’s (CSPP) impact on European corporate bonds’ credit and liquidity risks and real economic activity. The results show that the CSPP’s announcement (“stock effect”) lowered the credit spread of eligible corporate bonds, measured by the G-spread, by ten basis points (bps) or 9.8%. The liquidity of eligible bonds also improved as their scaled bid-ask spread decreased by 2.6 bps or 4.6%. Moreover, for every 1 billion euros of ECB corporate bond monthly purchases (“flow effect”), the scaled bid-ask spread of eligible bonds declined by 0.6 bp from June 2016 to December 2018. As for economic activity, QE’s stock effect raised corporate debt – mainly for German firms – and the stock and flow effects stimulated dividend spending, especially for German and French firms. These results indicate that QE initially improved corporate bond operations and encouraged borrowing. Moreover, the CSPP continued to boost the liquidity of corporate bonds and dividend expenditure throughout its implementation, but not investment. Therefore, QE had limited success in stimulating economic activity.

Are lower interest rates really associated with higher growth? New empirical evidence on the interest rate thesis from 19 countries

AbstractThere is a substantial literature on the link between finance and growth. Empirical evidence remains inconclusive and the debate continues. In this paper, we adopt the research strategy of focusing on a narrower underlying issue that remains at the core of most macroeconomic theories, namely the interest rate thesis (that lower rates result in higher growth and vice versa). If there are problems with this relationship, this could explain the lack of consensus on the finance‐growth nexus. The question is also of practical relevance: Central banks have been focusing on interest rate policy on the assumption that the interest rate thesis holds. There are theoretical reasons why this may not be the case. We conduct an analysis of time‐varying dynamic conditional correlation in a GARCH model and of the direction of statistical causation between nominal interest rates and real economic activity in 19 industrialized and emerging economies. We find evidence that interest rates are not negatively correlated with economic growth and do not cause growth. Instead, we find evidence that the relationship may be the opposite in both dimensions. This adds to recent doubts about the prevailing conduct of monetary policy and common theoretical models. Specifically, lowering interest rates may be counter‐productive when trying to stimulate the economy.

Oil prices, exchange rates and interest rates

There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of traditional oil demand and oil supply shocks from the effects of exogenous variation in the U.S. real interest rate and in the real value of the U.S. dollar. Our approach exploits a combination of sign and zero restrictions and narrative restrictions motivated by economic theory and extraneous evidence. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between these variables.