Real Output Growth Research Articles

A Treatise on the TARGET2 Imbalances & Stagnation in Europe

Since the Global Financial Crisis, there have been two parallel issues faced by the Eurozone, Stagnation and TARGET2 imbalances. This study analyses the aspect of settling TARGET2 in an equitable and fair manner that could also resolve the issues of sluggish growth, deflation and high unemployment in Europe. It is proposed that the TARGET2 balances are settled by an adjustment to the monetary base in the EMU. Specifically, it implies that the Eurozone members are granted a right to settle their imbalances against Euro-system in proportion to their capital key weights. The proposed approach will have four order/tier effects which include, a) adjustment of monetary base at the EMU level, b) creation of additional liquidity in the Euros -system member states, c) creation of much needed fiscal space and d) cross-border spillovers among the EMU members. While keeping the bleak economic outlook of Eurozone in context, we analysed the implication of proposed mechanism at first tier using a Factor-Augmented VAR model on data from 2000Q1 to 2017Q1. Our key results suggest that such an approach would lead to a considerable increase in the real output growth, investment, consumption, gross fixed capital formation, stock markets as well as exports and imports of Germany, Greece, Ireland, Italy, Portugal and Spain. The magnitude of the proposed mechanism is comparable to the stimulative stance taken by authorities since the GFC and qualitative easing of “whatever it takes”. Comparatively, there are substantial gains for the TARGET2 surplus countries like Germany than the deficit countries as the former can address its public expenditure needs as well as settle large external surplus without breaching balanced budget act (Schuldenbremse). Given that, the adjustment will be based on the capital key weights and existing arrangements, the proposed approach is equitable, fair, and can be used as an unconventional tool by the ECB.

150 YEARS OF THE OIL PRICE–MACROECONOMY RELATIONSHIP

We use the longest span data that have ever been studied before (from 1870 to 2014) to investigate the relationship between the price of oil and the level of economic activity in the United States. In the context of a bivariate (identified) structural generalized autoregressive conditional heteroscedasticity (GARCH)-in-Mean VAR in real output growth and the change in the real price of oil, we find that uncertainty about oil prices has had a negative and significant effect on real output. We also find that the responses of real output growth to positive and negative shocks are not very informative of whether they are symmetric or asymmetric, and that accounting for oil price uncertainty tends to amplify the negative dynamic response of real output growth to unfavorable (positive) oil price shocks.

150 Years of the Oil Price-Macroeconomy Relationship

We use the longest span data that have ever been studied before (from 1870 to 2014) to investigate the relationship between the price of oil and the level of economic activity in the United States. In the context of a bivariate (identified) structural GARCH-in-Mean VAR in real output growth and the change in the real price of oil, we find that uncertainty about oil prices has had a negative and significant effect on real output. We also find that the responses of real output growth to positive and negative shocks are not very informative of whether they are symmetric or asymmetric, and that accounting for oil price uncertainty tends to amplify the negative dynamic response of real output growth to unfavorable (positive) oil price shocks.

The Impact of Oil Price on South African GDP Growth: A Bayesian Markov Switching‐VAR Analysis

AbstractOne characteristic of many macroeconomic and financial time series is their asymmetric behaviour during different phases of a business cycle. Oil price shocks have been amongst those economic variables that have been identified in theoretical and empirical literature to predict phases of business cycles. However, the role of oil price shocks to determine business cycle fluctuations has received less attention in emerging and developing economies. The aim of this study is to investigate the role of oil price shocks in predicting phases of the South African business cycle associated with higher and lower growth regimes. By adopting a regime dependent analysis, we investigate the impact of oil price shocks under two phases of the business cycle, namely high and low growth regimes. As a net importer of oil, South Africa is expected to be vulnerable to oil price shocks irrespective of the phase of the business cycle. Using a Bayesian Markov switching vector autoregressive (MS‐VAR) model and data for the period 1960Q2 to 2013Q3, we found the oil price to have predictive content for real output growth under the low growth regime. The results also show the low growth state to be shorter‐lived compared to the higher growth state.

How Government Statistics Adjust for Potential Biases from Quality Change and New Goods in an Age of Digital Technologies: A View from the Trenches

A key economic indicator is real output. To get this right, we need to measure accurately both the value of nominal GDP (done by Bureau of Economic Analaysis) and key price indexes (done mostly by Bureau of Labor Statisticcs). All of us have worked on these measurements while at the BLS and the BEA. In this article, we explore some of the thorny statistical and conceptual issues related to measuring a dynamic economy. An often-stated concern is that the national economic accounts miss some of the value of some goods and services arising from the growing digital economy. We agree that measurement problems related to quality changes and new goods have likely caused growth of real output and productivity to be understated. Nevertheless, these measurement issues are far from new, and, based on the magnitude and timing of recent changes, we conclude that it is unlikely that they can account for the pattern of slower growth in recent years. First we discuss how the Bureau of Labor Statistics currently adjusts price indexes to reduce the bias from quality changes and the introduction of new goods, along with some alternative methods that have been proposed. We then present estimates of the extent of remaining bias in real GDP growth that stem from potential biases in growth of consumption and investment. And we take a look at potential biases that could result from challenges in measuring nominal GDP, including those involving the digital economy. Finally, we review ongoing work at BLS and BEA to reduce potential biases and further improve measurement.

The Risk Premium on Balance Sheet Capacity

We show that fluctuations in the risk-bearing capacity of US securities broker-dealers are priced in the cross-section of expected stock excess returns. We show that the intermediary risk premium dwarfs the premiums on benchmark factors both unconditionally and dynamically. A portfolio that tracks our intermediary factor sports a dramatically higher Sharpe ratio than benchmark portfolios. We find that the risk premium on balance sheet capacity contains significant macroeconomic information. Specifically, we document that the intermediary risk premium is a significant predictor of US real output growth and that the cyclical component of the intermediary risk premium predicts US recessions.

Empirical Analysis of the Relationship Between Energy Consumption, CO2 Emissions and Economic Growth in Tunisia

This paper examines the long run and causal relationship issues between economic growth, energy consumption and carbon emissions by using vector error correction model for the case of Tunisia within 1970-2010. Empirical results using time series data suggest an evidence of a long-run relationship between the variables at 5% significance level in Tunisia. A Granger causality analysis is conducted amongst the variables. The overall results indicate bidirectional causality between energy consumption and CO2 emissions and a unidirectional causality running from pollutant emissions to economic growth. But there is no direct relation between energy consumption and economic growth. Thus, our results reveal that in short term energy conservation policies, such as rationing energy consumption have no effect on the real output growth of Tunisia.

Marginal Employment Growth Effects In The South African Economy

South Africa relative to its peers (upper middle income countries) suffers from high unemployment and sub-optimal economic growth. This study investigates the ‘marginal effects of employment’ with respect to real output and capital in South Africa, using annual data covering the period 1946-2015. It estimates the responsiveness of employment to real output growth and capital, employing the short and long-run dynamic interactions between these variables via the application of the VAR/VECM Johansen (1991) framework. The results show that there exists a statistically significant long-run co-integrating relationship between labour employment and real GDP growth. Marginal employment growth effect is positive; a one per cent increase in GDP tends to increase employment by about one third of one per cent. Employment adjusts consistent with expectations when it overshoots its structural relationship with other variables. However, real output tends to adjust contrary to expectations, implying significant diminishing returns to employment in the economy. Growth in capital impacts positively on output and employment. The study concluded that greater labour market flexibility and higher worker productivity is needed across all sectors of the economy.

The Decline of Manufacturing in the U.S. Economy: Impacts of China's Trade Shockk, Trump's Protectionist Tariffs, and the Drivers of Manufacturing Job Losses (Presentation Slides)

The long-term declining role of manufacturing in the U.S. economy – reflecting a shift of the economy after World War II to a post-industrial orientation with an increased emphasis on services – was accelerated by the effects on manufacturing jobs and trade deficits of President Reagan’s budget deficits in the 1980s and China’s recent trade penetration. Similarities of Reagan’s policies to President Trump’s proposed protectionist tariffs and the cross-border corporate tax reform advocated by House Republicans in February 2017 suggest a possible partial reversal of the long-term job decline, but the ensuing major dislocations in jobs are unlikely to lead to a net increase in manufacturing jobs. The magnitude and fast pace of China’s import penetration, coupled with anemic demand for domestic goods and high productivity gains in American factories, are associated with the 33 percent decline of 5.7 million domestic manufacturing jobs in the 2000-10 period – the largest loss in a decade in U.S. history. The effects on manufacturing employment associated with trade, domestic demand, and productivity strongly suggest that the largest impact – accounting for over 85 percent of total manufacturing jobs lost in the 2000s – is attributable to technological advances in U.S. factories sustaining productivity gains, with trade a relatively minor contributory factor, when viewed from the long-term perspective. The superior productivity gains, as well as the vaunted growth in real value-added output, associated with manufacturing are driven by the performance of its computer and electronic products industry, representing only 13 percent of total manufacturing value added. China’s trade competition challenged the prevalent assumption, based on bilateral trade pacts after World War II, suggesting that economies recover from ‘trade shocks’ by displaced workers shifting into higher-productivity export industries. Free trade agreements and China’s trade penetration – with the benefits not evenly distributed in the U.S. – are associated with the geographically-concentrated and unexpected political results of the November 2016 elections.

Fear Thy Neighbor: Spillovers from Economic Policy Uncertainty

High levels of economic policy uncertainty in various parts of the world revamped the de- bate about its impact on economic activity. With increasingly stronger economic, fi nancial, and political ties among countries, economic agents have more reasons to be vigilant of for- eign economic policy. Employing heterogeneous panel structural vector autoregressions, this paper tests for spillovers from economic policy uncertainty on other countries' economic ac- tivity. Furthermore, using local projections, the paper zooms in on shocks originating in the United States, Europe, and China. Our results suggest that economic policy uncertainty re- duces growth in real output, private consumption, and private investment, and that spillovers from abroad account for about two-thirds of the negative effect. Moreover, uncertainty in the United States, Europe, and China reduces economic activity in the rest of the world, with the effects being mostly felt in Europe and the Western Hemisphere.

High Growth Young Firms: Contribution to Job, Output and Productivity Growth

Recent research shows that the job creating prowess of small firms in the U.S. is better attributed to startups and young firms that are small. But most startups and young firms either fail or don’t create jobs. A small proportion of young firms grow rapidly and they account for the long lasting contribution of startups to job growth. High growth firms are not well understood in terms of either theory or evidence. Although the evidence of their role in job creation is mounting, little is known about their life cycle dynamics, or their contribution to other key outcomes such as real output growth and productivity. In this paper, we enhance the Longitudinal Business Database with gross output (real revenue) measures. We find that the patterns for high output growth firms largely mimic those for high employment growth firms. High growth output firms are disproportionately young and make disproportionate contributions to output and productivity growth. The share of activity accounted for by high growth output and employment firms varies substantially across industries – in the post 2000 period the share of activity accounted for by high growth firms is significantly higher in the High Tech and Energy related industries. A firm in a small business intensive industry is less likely to be a high output growth firm but small business intensive industries don’t have significantly smaller shares of either employment or output activity accounted for by high growth firms.

Rolling window selection for out-of-sample forecasting with time-varying parameters

There is strong evidence of structural changes in macroeconomic time series, and the forecasting performance is often sensitive to the choice of estimation window size. This paper develops a method for selecting the window size for forecasting. Our proposed method is to choose the optimal size that minimizes the forecaster’s quadratic loss function, and we prove the asymptotic validity of our approach. Our Monte Carlo experiments show that our method performs well under various types of structural changes. When applied to forecasting US real output growth and inflation, the proposed method tends to improve upon conventional methods, especially for output growth.

Fundamental disagreement

We document a novel set of facts about disagreement among professional forecasters: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time varying at all horizons. We propose a generalized model of imperfect information that can jointly explain these facts. We further use the term structure of disagreement to show that the monetary policy rule perceived by professional forecasters features a high degree of interest-rate smoothing and time variation in the intercept.

US monetary policy shocks and the Chinese economy: a GVAR approach

ABSTRACTUsing a global vector auto regressive (GVAR) methodology, this article examines the impact of US monetary policy shocks on China’s major macroeconomic indicators. Our analysis reveals that a positive shock to the US money supply growth rate initially increases China’s inflation rate but after some time this effect completely disappears. This shock also raises China’s short-term interest rate and the Chinese currency appreciates against the US dollar. A positive shock to the US short-term interest rate increases China’s short-term interest rate but the real output growth and inflation rates decline and the Chinese currency appreciates.

Inflationary shocks and real output growth in nine Muslim-majority countries: Implications for Islamic banking and finance

Low and stable inflation is important for maintaining the viability of Islamic banking and finance within a dual banking system. Inflationary shocks when transmitted to real output growth cause a shift of investment to fixed return products as a hedge against the uncertainty of returns on equity investment under Islamic profit-loss sharing contracts. This study examines the transmission of inflationary shocks to the real economy for nine Muslim-majority countries (Bahrain, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan, Saudi Arabia, and Turkey) that have introduced Islamic banking, all except Iran within dual-banking systems. A structural vector autoregressive (SVAR) framework is deployed to understand macroeconomic relationships using annual data from the late 1970s to 2014. The key finding is that inflationary shocks affect real interest and exchange rates which in turn impact real output growth. The paper argues that the absorption of inflationary shocks in real interest and exchange rates is the outcome of rigidities in nominal interest and exchange rates within repressed financial systems. Policy regimes that allow for greater adjustment in nominal interest and exchange rates under a deregulated financial system would offer better shock absorption capacity which would lead to less volatility in inflation, real interest and exchange rates, and real output growth. The resulting more stable macroeconomic environment would be more conducive to the development of an Islamic financial sector that would promote economic growth.

On interactions between remittance outflows and Saudi Arabian macroeconomy: New evidence from wavelets

The effect of workers' remittance outflows on macroeconomic variables of host countries is a controversial issue. The purpose of this paper is to study lead/lag interactions between workers' remittance outflows and macroeconomic leading variables in Saudi Arabia for 1980–2013 within a time–frequency framework. To this end, we perform three wavelet variants, namely, the wavelet power spectrum, the cross-spectrum wavelet, and the coherence wavelet. We show that remittance outflows are strongly associated with the main Saudi aggregates and that their relationships change across time scale and frequency bands. In the short- and mid-term, real output growth and government expenditures guide remittance outflows. More specifically, government expenditures positively affect remittance shares to real outputs. In addition, the wavelet analysis reveals a positive causality link from the active population to remittances over low-frequency bands. These outcomes have several prominent implications and point to practical recommendations in terms of monetary policy coordination and financial stability.

Central bank transparency and the consensus forecast: What does The Economist poll of forecasters tell us?

We are interested, in this paper, in studying the effects that central bhat transparency is a prerequisite for accanks exert on private sector forecasts by means of their transparency and communication measures. We analyze the impact of central bank transparency on the accuracy of the consensus forecasts (usually calculated as the mean or the median of the forecasts from a panel of individual forecasters) for a series of macroeconomic variables: inflation, Real output growth and the current account as a share of GDP for 7 advanced economies. Interestingly, while it is found of significance of central bank transparency and communication measures on forecasts themselves, there appear some limits of the same measures when we study their impact on forecast errors. Our findings, indeed, suggest that deviations of the economic forecast data from the realized ones (RGDP and the current account as a share of GDP) are a bit affected by the central bank transparency measures considered in the paper. Inflation forecast errors, especially, are not affected at all by those measures. A possible explanation (among others) could be attributed to the inefficiency of the mean forecasts. Inefficiency of the consensus forecasts is not a new issue from a theoretical point of view, but its empirical relevance is for the first time (to our knowledge) questioned on data extracted from the Economist poll of forecasters. More particularly, our paper extracts practical implications over the effectiveness of transparent announcements in forecast formation process. We rely on two noisy information models, though having different mechanisms (Kim et al., 2001; Morris and Shin, 2002) both of which are consistent with overweighting issue to explain the inefficiency of the consensus forecast.

Energy consumption, CO2 emissions, economic growth, and foreign trade relationship in Cyprus and Malta

ABSTRACTThis paper examines the long-run and causal relationship issues between economic growth, carbon emissions, energy consumption, foreign trade ratio, and employment ratio in Cyprus and Malta by using autoregressive distributed lag (ARDL) bounds testing approach of cointegration and error-correction-based Granger causality models. Empirical results over the period 1980–2006 suggest an evidence of a long-run relationship between the variables at 5% significance level only in Malta. Thus, Granger causality models are estimated only for Malta. Results for the existence and direction of Granger causality show that the causality runs from carbon emissions, energy consumption, foreign trade ratio, and employment ratio to economic growth but not vice versa in Malta. The overall results indicate that energy conservation policies, such as rationing energy consumption and controlling carbon dioxide emissions, are likely to have no adverse effect on the real output growth of Malta.

Policy Options to Address Slow Income Growth and Improve Income Mobility

Over an extremely long period of time, real compensation growth does track real output growth. However, for many years the level of male compensation was unusually high relative to productivity, so much of what has happened since 1973 has been a course correction where productivity catches up. Income concentration has risen, but, typically, in the United States periods of increasing concentration have been periods of higher median income growth. The data suggest that the share of earnings going to the top 1 percent peaked around 2000, and that upward income mobility in the United States has not diminished, and is comparable to that in other nations. We do need policy changes to promote upward mobility, both indirectly by encouraging aggregate growth and targeting those that help poor children move ahead.

Long-Run Effects of Macro Shocks on the Korean Stock Market: A Structural VAR Approach

This paper examines the long-run effect of major macroeconomic shocks, using the structural vector autoregression (SVAR) approach, on stock prices for the Korean stock market, one of the leading emerging markets. Novel features of the modeling is to expand the dimension of the bivariate SVAR model of Blanchard and Quah (1989) and of Hess and Lee (1999) by including stock market shocks in addition to the pre-identified supply and demand shocks. Moreover, our three-variable SVAR model is further generalized to a five-variable SVAR, augmenting interest rate shocks and foreign exchange rate shocks. The model is estimated using monthly Korean market data from January 2003 to September 2015, and further estimated with two sub-samples using the recent global financial crisis period and non-crisis period. The estimation results using a three-variable model show that stock returns have a negative relation with demand shocks and a permanent positive relation with supply shocks. Risk premium shocks show a negative relation with inflation and a positive relation with real output growth. Interestingly, the subsample results indicate that the market fluctuations during the global financial crisis period have relatively little effect on the Korean stock market and its macro variables. With the five-variable model estimation, a ‘price puzzle’ is documented with evidence of a positive correlation between inflation and the interest rate shock. A positive correlation is also observed between inflation and the supply shocks in the long run. Lastly the forecast error variance decomposition indicates that the monetary policy change is the leading determinant of the long-run level of stock prices in the Korean stock market. These findings suggest that the recent expansionary monetary policy should be cautiously implemented in accordance with inflation movement.