Recessionary Shocks Research Articles

Quantifying\xa0economic resilience from input\u2013output susceptibility to\xa0improve predictions of economic growth and recovery

Modern macroeconomic theories were unable to foresee the last Great Recession and could neither predict its prolonged duration nor the recovery rate. They are based on supply−demand equilibria that do not exist during recessionary shocks. Here we focus on resilience as a nonequilibrium property of networked production systems and develop a linear response theory for input−output economics. By calibrating the framework to data from 56 industrial sectors in 43 countries between 2000 and 2014, we find that the susceptibility of individual industrial sectors to economic shocks varies greatly across countries, sectors, and time. We show that susceptibility-based growth predictions that take sector- and country-specific recovery into account, outperform—by far—standard econometric models. Our results are analytically rigorous, empirically testable, and flexible enough to address policy-relevant scenarios. We illustrate the latter by estimating the impact of recently imposed tariffs on US imports (steel and aluminum) on specific sectors across European countries.

Cluster Externalities, Firm Capabilities, and the Recessionary Shock: How the Macro-to-Micro-Transition Shapes Firm Performance During Stable Times and Times of Crisis

In this paper, we examine the macro-to-micro-transition of cluster externalities to firms and how it is affected by the macroeconomic instability caused by the recessionary shock of 2008/2009. Using data from 16,166 manufacturing and business services firms nested in 390 German regions, we employ within-firm regression techniques to estimate the impact of cross level interactions between firm- and cluster-level determinants on phase-related differences in firm performance between a pre-crisis (2004-2007) and a crisis period (2009-2011). The empirical results validate the existence of a macro-to-micro-transition that evolves best in the case of broad firm-level capabilities and variety-driven externalities. Furthermore, the results indicate that the transition strongly depends on the macroeconomic cycle. While the transition particularly benefits from a stable macroeconomic environment (2004-2007), its mechanisms are interrupted when being exposed to economic turmoil (2009-2011). Yet, the crisis induced interruption of the transition is mainly restricted to the national recession in 2009. As soon as the macroeconomic pressure diminishes (2010-2011), we observe a reversion of the transmission mechanisms to the pre-crisis level. Our study contributes to the existing literature by corroborating previous findings that the economic performance of firms depends on a working macro-to-micro transition of external resources, which presupposes sufficient cluster externalities and adequate firm-level combinative capabilities. In contrast to previous studies on this topic, the transition mechanism is not modeled as time-invariant. Instead, it is coupled to the prevailing macroeconomic regime.

Exchange rate regimes in a liquidity trap

Using several specifications of a two-sector two-country DSGE model, this paper studies the performance of alternative exchange rate regimes in a liquidity trap caused by a large deflationary shock that pushes the nominal interest rate to its lower bound. We show that, contrary to common belief during the recent Euro crisis, the currency union can outperform the independent floating regime in dealing with the duration and depth of a liquidity trap. Although the welfare effects of the liquidity trap are conditional upon assumptions regarding export price setting and financial market structures, we find that the currency union welfare-dominates the independent floating for a plausible model with local currency pricing and incomplete asset markets. Targeting the exchange rate as a monetary policy rule allows for an independent policy to outperform the monetary union, highlighting the role of the exchange rate regime choice as a preventive strategy to address the adverse effects of deflationary and recessionary shocks.

Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union

The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.

Operationalizing Regional Resilience: From Theory to Practice

Interest in analyzing the dynamics of the Great Recession among regional economists has largely focused on ‘regional resilience.’ This concept, while still not fully formed, considers the relationship between regional characteristics and the regional response to economic shocks, particularly the Great Recession. Yet, one key barrier to the development of this line of research is a lack of consensus on how to operationalize and measure regional resilience. Researchers typically make arbitrary decisions on how to define the timing, duration, and magnitude of recessionary shocks at the regional level, confounding the analysis and making comparisons across studies difficult. In this paper, I develop a novel approach to defining the time, duration, and magnitude or regional recessionary shocks. I use methods common to regional economics to decompose exogenous recessionary shocks from the regional response to the shock. Using this method, I demonstrate how researchers can use this approach to conduct regional resilience analysis using data for US counties and MSAs.

Sovereign ratings, macroeconomic dynamics, and fiscal policy. Interactions within a stock flow consistent framework

AbstractOperating in the context of deregulated financial markets, credit rating agencies do not only ‘provide an opinion’, but also affect macroeconomic dynamics. By utilizing a two‐country stock flow consistent model that provides a representation of the Eurozone, the paper connects the movements of sovereign ratings with the dynamics of the financial market and the constraints on fiscal policy. With endogenous fiscal expenditure and an endogenous credit rating mechanism the model shows how following a recessionary shock, a rating downgrade can influence the financial constraints that surround a government, pushing it toward fiscal austerity and thereby deepening the already ongoing recession.

Determinants of regional resilience to economic crisis: a European perspective

ABSTRACTThe impact of the economic crisis has been highly asymmetric across the European regions. The objective of this paper is to investigate the determinants of resilience to economic crisis across European regions. Regional economic resilience was assessed based on employment changes during 2008–2013, while socioeconomic determinants were analysed pre-crisis (2002–2007). A highly heterogeneous pattern of resilience was observed within countries, while significant differences were also revealed between the continental northern-central regions and the southern periphery. A multilevel logistic regression model indicated the magnitude of country-effects on the performance of regional employment during crisis periods. Both EU-referenced and country-referenced regional resilience identified the positive effect of accessibility and the negative effect of a large manufacturing sector in the ability of regions to withstand recessionary shocks. Education and economic development level positively affected the resilience of both large and small regional European economies. Investing in education enhances the spatial homogeneity across Europe in terms of its ability to react to economic shocks. The results reveal the importance of narrowing disparities among regions and formulating targeted and differentiated regional development policies at country level, taking into consideration the size of the economy of the regions.

Regional economic resilience: the experience of the Italian local labor systems

After defining the concept of resilience and its application to the regional context, the paper presents a preliminary evaluation of regional economic resilience in the case of the Italian regions. In doing so, we follow the approach by Martin (J Econ Geogr 12:1–32, 2012) and Martin and Sunley (2015) who identify three different dimensions to regional economic resilience: (a) resistance, i.e., the degree of sensitivity or depth of reaction of a regional economy to a recessionary shock; (b) recovery, i.e., the speed and magnitude of the recovery; (c) reorientation and renewal, i.e., the ability of a region to adapt in response to the shock and renew its growth path. The analysis is conducted at the local labor systems (LLS) geographical level and focuses, at this stage, only on the first two dimensions of resilience, i.e., resistance and recovery. The recessionary shock (2009–2010) is defined following the Italian National Statistical Institute approach for which a recession implies a decrease in GDP for three consecutive trimesters. The pre-recessionary period is 2007–2008 and the recovery period 2011 (as a new recession started again in Italy at the end of 2011). The results clearly point at very heterogeneous resilience for the Italian LLS.

Industrial Variety and Structural Change in Korean Regional Manufacturing, 1992–2004

AbstractThere has been increasing concern about the roles of industrial variety, particularly related and unrelated variety, in adaptive response of regional economies to recessionary shock. Using South Korean regional manufacturing data around the 1997 Asian financial crisis, this paper investigates how differently related and unrelated variety affect intrasectoral and intersectoral structural change in regional economy. The empirical findings reveal that regions with higher related variety adapt to recessionary shock mainly through intrasectoral structural change, but that related variety diminishes the opportunity for regional economies to pursue intersectoral reorganization. However, unrelated variety makes up for this negative effect as it increases intersectoral structural change. This study sheds light on the complementary roles of related and unrelated variety in regional adaptability and path creation or diversion.

Do business cycles affect patenting? Evidence from European Patent Office filings

This paper studies the sensitivity of patent filings to the business cycle using patent filings at the European Patent Office (EPO). Using a dynamic model of patenting and the Hodrick-Prescott (HP) filter method to separate the cyclical component of real Gross Domestic Product (GDP) from its trend component, we find that patent filings are strongly pro-cyclical. This supports the view that short term resource constraints affect patenting decisions, even if there are longer term factors that determine innovation. The study also has significance for forecasting patenting behavior, which is important for policy decision-making, institutional operations, and strategic business planning. Forecasts that rely only on trends prove to be less accurate amidst economic booms and recessionary shocks, such as the recent global financial crisis.

Regional Resilience of the Ural Federal District in Economic Shocks and Crises: Medico-Demographic and Environmental Aspects

Health, demographic and environmental consequences of 1998 and 2008 economic crises for the Ural Federal District are considered in the paper. Regional resilience is defined as the ability of a regional socio-economic system to withstand, absorb or overcome an internal or external economic shock. The quantitative analysis of regional resilience of the subject entities of the Ural Federal District is based on two interrelated dimensions: resistance, those are the vulnerability or sensitivity of a regional socio-economic system to disturbances and disruptions; and the speed and extend of recovery from such a disruption. Because resilience as a concept captures resistance to the shock and recovery from it, resistance indexes and recovery indexes are used for assessing the impact of regions to recessionary shocks. Three sets of resilience indicators were used: economic, environmental and medico-demographic ones. The main criteria for selecting resilience indicators were their robustness as a measure of the territorial impact of the economic crisis and availability of long time series. Special attention is paid to the question identification of the qualitative and quantitative factors, which form the territorial characteristics enabling some regions to resist, or move out of, economic downturn more effectively than others. Unfortunately, a valid answer to the question why some regions are more able to withstand an economic downturn than others, or are able to recover faster, cannot be given at present. Resilience to an economic shock does not necessarily imply that the economy is otherwise strong and performing well over the longer-term. Regions that experience strong economic growth prior to a shock may appear to be less resilient. Such components of the regional socio-economic system as reserves of natural resources, sectoral structure of regional economy, skills of population, diversified economy and quality of governance do not define uniquely regional resilience.

Comparing the financial performance of timber REITs and other REITs

The return and risk characteristics of three types of Real Estate Investment Trusts (REITs) in the United States are evaluated by the intertemporal capital asset pricing model (CAPM) and the multivariate generalized autoregressive conditional heteroscedasticity (GARCH) model. The three types of REITs are timber REITs, which focus on timberland management; specialized REITs, which focus on properties that are specialized in a single use; and common REITs, which consist of all REITs except specialized REITs. Results from the intertemporal CAPM demonstrate that REITs behave like procyclical small and value stocks. Results from multivariate GARCH model show that the conditional volatilities of REITs rise more after good news and REITs as a whole respond positively to past shocks. Despite being a part of specialized REITs, timber REITs have large market capitalizations and no excess returns, and are insensitive to recessionary shocks. Timber REITs have the smallest unconditional variance and are most vulnerable to idiosyncratic shocks.

Recessionary Shock, Capital Mobility and the Informal Sector

Using the hybrid of Heckscher–Ohlin and Specific Factor models of trade, we show that the economic recession led to shock results for both capitalists and skilled workers. Some of the unionized unskilled workers lose formal sector employment and move onto the informal sector. When capital moves from the formal to the informal segments, both informal employment and wage can go up in latter’s segment. If capital does not move, informal employment expands and wage drops. Thus, recession may have actually benefitted a large number of informal workers.

Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe's Monetary Union

The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.

Economic crisis and regional resilience: Evidence from Greece

AbstractShift‐share and input‐output models are combined to explore the resilience of Greek regions to economic crisis. Model results indicate that rural regions are more resistant to recessionary shocks than urban regions. The analysis of the space‐specific ability of sectors to withstand economic shocks portrayed the resilience of agriculture, while food industry, although its impact overtime declined, managed to increase its employment in seven out of thirteen regions. The tourism sector contracted but showed more resilience in the island regions than in the continental regions. The spatial heterogeneity in the effects of the recessionary shocks re‐emphasizes the need for targeted and differentiated regional development policies.

Forward guidance with an escape clause: when half a promise is better than a full one

ABSTRACTUsing a three-equation New Keynesian model we find that incorporating an escape clause (EC) into forward guidance (FG) is welfare improving as it allows the monetary authority to avoid cases in which the cost of reduced flexibility is too high. The EC provides the central bank with another instrument (additional to the promised policy rate), the announced threshold. The greater the size of the recessionary shock the lower the optimal promised rate and the higher the optimal threshold (i.e. the higher the probability of delivering the promised rate). While FG with an EC is better than discretion for facing any zero-lower bound (ZLB) situation, unconditional FG performs better than discretion only in the most extreme of ZLB events. Furthermore, even for very large recessionary shocks it is not optimal to make unconditional promises.

How Did Young Firms Fare During the Great Recession? Evidence from the Kauffman Firm Survey

We examine the evolution of several key firm economic and financial variables in the years surrounding and during the Great Recession using the Kauffman Firm Survey, a large panel of young firms founded in 2004 and surveyed for eight consecutive years. We find that these young firms experienced slower growth in revenues, employment, and assets and faced tighter financing conditions during the recessionary years. While we find some evidence that firm growth picked up following the recession, it is not clear that it returned to the levels it would have been absent the recessionary shock. We find little evidence that financing conditions for young firms loosened following the recession and show that financing constraints, in addition to diminished demand, may have contributed to these firms' slower growth. We discuss the strengths and the limitations of the Kauffman Firm Survey in measuring the impact of the Great Recession on young firms and their founders and consider features of future data collection and measurement efforts that would be useful in studying entrepreneurial activity over the business cycle.

How Did Young Firms Fare During the Great Recession? Evidence from the Kauffman Firm Survey

We examine the evolution of several key firm economic and financial variables in the years surrounding and during the Great Recession using the Kauffman Firm Survey, a large panel of young firms founded in 2004 and surveyed for eight consecutive years. We find that these young firms experienced slower growth in revenues, employment, and assets and faced tighter financing conditions during the recessionary years. While we find some evidence that firm growth picked up following the recession, it is not clear that it returned to the levels it would have been absent the recessionary shock. We find little evidence that financing conditions for young firms loosened following the recession and show that financing constraints, in addition to diminished demand, may have contributed to these firms’ slower growth. We discuss the strengths and the limitations of the Kauffman Firm Survey in measuring the impact of the Great Recession on young firms and their founders and consider features of future data collection and measurement efforts that would be useful in studying entrepreneurial activity over the business cycle.

The role of regional policies along with the external and endogenous factors in the resilience of regions

This article aims to discuss the importance of the different policies and measures defined by governments in the resilience of regions, besides their connectedness to the global economic system and their endogenous capacities. The article explores the importance of different attributes in the resilience of Turkish regions (26 NUTS II regions) in the last two recessionary shocks and in the following recovery periods. By analysing the role of regional policies in the resilience of regions in two distinct periods, the article concludes that the existing policies have made only a limited contribution to the building of resilient regions, and emphasises the need for a new perspective in the developing of policies for regional resilience.

Effects of the Great Recession: Health and Well-Being

The existing evidence linking recessions to individual and population health presents a puzzle. Some studies show that people who experience the kinds of labor market, housing, and asset shocks that proliferate in recessions suffer negative health consequences, whereas other studies show that mortality rates fall when the economy worsens. This review synthesizes evidence from these distinct research traditions in light of emerging findings from the Great Recession of 2007–2009. It traces pathways by which macroeconomic changes “get under the skin” and generate contradictory aggregate- and individual-level consequences. Research on the longer-term health effects of recessions could be strengthened by integrating theoretical and analytical approaches from sociology. These include a multilevel perspective that considers how individuals cope with recessions as members of families and communities embedded in different policy environments, and attention to cascades of recessionary shocks, individuals' strategies for coping with them, and the way these intersect with health trajectories.