Sign Restrictions Approach Research Articles

Investment-specific technology shocks and business cycle: evidence from a sign restriction approach

Investment-specific technology shocks and business cycle: evidence from a sign restriction approach

Set Identification of Price Elasticities of Demand - A Narrative Sign Restriction Approach

Set Identification of Price Elasticities of Demand - A Narrative Sign Restriction Approach

The effects of fiscal policy shocks in Bangladesh: An agnostic identification procedure

This paper analyzes the macroeconomic effects of fiscal shocks in Bangladesh using the sign restriction approach in a Bayesian structural vector autoregression (SVAR) framework. We identify a generic business cycle shock to deal with the endogenous movement of fiscal variables along with a monetary policy shock to absorb the variations due to those shocks. Both unanticipated and anticipated fiscal shocks, that is, government expenditure and revenue shocks, are also identified by minimal sign restrictions. In identifying those shocks, we do not impose any restrictions on the sign of the key variable of interest. We find that private investment and consumption significantly increase due to expansionary government expenditure shock. Such an increase in private consumption is consistent with neo-Keynesian prediction. The fall in output due to the tax increase shock is highly robust. Private consumption also decreases due to a tax increase, although investment does not. The results suggest that fiscal policy, especially tax policy, is more effective than monetary policy in stabilizing output. Moreover, the fiscal authority could increase government expenditure without hurting private investment.

«Кредитный взгляд» на монетарную политику в России

In this paper, I assess the effectiveness of credit channels of monetary transmission in Russia. I use a dynamic factor model with monetary policy shocks identified using sign restrictions approach. The analysis confirmed the effectiveness of the bank lending channel for consumer loans and short- and medium-term corporate loans. A significant effect of monetary impulses on bank capital was found. At the same time, borrowers’ balance sheet channel is not amplifying, but, on the contrary, restraining the effect of monetary shocks on the economy

Identification of Economic Shocks by Inequality Constraints in Bayesian Structural Vector Autoregression

AbstractTheories often make predictions about the signs of the effects of economic shocks on observable variables, thus implying inequality constraints on the parameters of a structural vector autoregression (SVAR). We introduce a new Bayesian procedure to evaluate the probabilities of such constraints, and, hence, to validate the theoretically implied economic shocks. We first estimate a SVAR, where the shocks are identified by statistical properties of the data, and subsequently label these statistically identified shocks by the Bayes factors calculated from their probabilities of satisfying given inequality constraints. In contrast to the related sign restriction approach that also makes use of theoretically implied inequality constraints, no restrictions are imposed. Hence, it is possible that only a subset or none of the theoretically implied shocks can be labelled. In the latter case, we conclude that the data do not lend support to the theory implying the signs of the effects in question. We illustrate the method by empirical applications to the crude oil market, and U.S. monetary policy.

Dynamics of part-time employment to an aggregate shock: A sign-restriction approach

This paper provides new stylized facts about the responses of the part-time employment share, the transition probability from full-time to part-time and the one from part-time to full-time jobs to a negative aggregate shock. The recessionary aggregate shock is identified within a sign-restriction VAR framework by imposing a short-run negative co-movement between unemployment and vacancies. The negative aggregate shock pushes the part-time employment share up. The latter increase is mainly due to a rise in the probability at which full-time work is transformed into part-time work without an intervening spell of unemployment. Given that such transitions mainly take place at the same firm/worker pair, these findings indicate that US firms use – in addition to the creation/destruction process – within-employment reallocation to adjust their labor input in recessionary episodes.

Assessing U.S. Aggregate Fluctuations Across Time and Frequencies

We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks affect these key variables in a broadly similar manner across all frequency bands. Finally, we assess the ability of standard DSGE models to replicate these findings. While the models generally capture low-frequency movements via stochastic trends and business-cycle fluctuations through various frictions, they fail at capturing the medium-term cycle.

Assessing U.S. Aggregate Fluctuations Across Time and Frequencies

We study the behavior of key macroeconomic variables in the time and frequency domain. For this purpose, we decompose U.S. time series into various frequency components. This allows us to identify a set of stylized facts: GDP growth is largely a high-frequency phenomenon whereby inflation and nominal interest rates are characterized largely by low-frequency components. In contrast, unemployment is a medium-term phenomenon. We use these decompositions jointly in a structural VAR where we identify monetary policy shocks using a sign restriction approach. We find that monetary policy shocks affect these key variables in a broadly similar manner across all frequency bands. Finally, we assess the ability of standard DSGE models to replicate these findings. While the models generally capture low-frequency movements via stochastic trends and business-cycle fluctuations through various frictions, they fail at capturing the medium-term cycle.

Effects of Monetary Policy on Food Inequality in India

Food insecurity and hunger are pressing issues in emerging market economies but have received less attention in the practice and conduct of monetary policy. This paper studies the impact of monetary policy on inequality in India. Specifically, we examine the impact of monetary policy shocks on the relative prices and the distribution of consumption, focusing on subsistence consumption of poor households. Food continues to be a significant component of standard poverty measures in emerging market economies. Using the most recent household survey data, we estimate the dynamic effects of monetary policy shocks on relative prices and the distribution of consumption in rural and urban India using a dynamic common factor model (Bernanke, Boivin, and Eliasz, 2005 and Stock and Watson, 2011), and identify monetary policy shocks using the sign restriction approach of Uhlig (2005). Our results show that expansionary monetary policy shocks increase the relative price of food, reduce the consumption of poor households, and raise consumption inequality across households. Increase in the relative price of following a monetary expansion disproportionately hurts the poor relative to the non-poor. This is the first study to provide evidence of a food price channel in monetary policy transmission to understand inequality. This study holds important policy implications for Indian central bankers and policymakers as well as for those in similar emerging market economies.

On the effects of monetary policy in Russia: The role of the space of spanned shocks and the policy regime shifts

This paper investigates the influence of monetary policy shocks in Russia on the basic macroeconomic and financial indicators. To identify the shocks of monetary policy, the Bayesian approach to the estimation of vector autoregressions (VARs) is applied, followed by extraction of the unexplained dynamics of monetary policy instruments (shocks) using both recursive identification and sign restrictions approach. The estimates show that the monetary policy shocks, apparently, cannot be attributed to the key drivers of cyclical movements in Russia, as they explain only less than 10% of the output variation and from 5 to10% of the prices variation. When applying recursive identification, no restraining effect of monetary policy on prices is found. Respective impact on output is negative and statistically significant in all identification procedures employed; however, the relative contribution of monetary shocks to output is not large. In addition, no significant effect of monetary policy tightening on the stabilization of the ruble exchange rate was found.

The cyclicality of labor-market flows: A multiple-shock approach

In this paper, we aim to establish some stylized facts about the relative contributions of the job-finding and separation rates to unemployment dynamics depending on the nature of structural shocks. The shocks in our Bayesian Structural VAR model are identified using a sign-restriction approach, and capture shifts in the three conditions determining labor-market equilibrium in matching models: the Beveridge curve, and the job-creation and job-destruction conditions. Using both US and French data, we identify an aggregate shock to match profitability (the aggregate-profitability shock), a shock specific to existing jobs (the reallocation shock) and a shock to the efficiency of the matching process (the matching-efficiency shock). We find that the relative contributions of the job finding and separation rates are notably different across shocks in both countries, but are similar across countries for each type of shock. Labor market dynamics appear to be Transatlantic despite well-known institutional differences. However, it must be emphasized that the reaction of the labor market variables to the matching-efficiency shock seems more muted in the US than in France.

The macroeconomic effects of fiscal consolidation policies in Greece

PurposeThis paper aims to investigate the effects of contractionary fiscal policy shocks on major Greek macroeconomic variables within a structural vector autoregression framework while accounting for debt dynamics.Design/methodology/approachThe sign restriction approach is applied to identify a linear combination of government spending and government revenue shock simultaneously while accounting for debt dynamics. Additionally, output and unemployment responses to fiscal shocks under different scenarios concerning the amalgamation of austerity measures are considered.FindingsThe results indicate that a contractionary consumption policy shock, namely, a 1 per cent decrease in government consumption and a 1 per cent increase in indirect taxes, is preferred, as it produces a minor decrease in output and substantially decreases public debt, while a contractionary wage policy shock is suitable only when the government aims to sharply reduce public debt, as the consequences for the economy are harsh. A contractionary investment policy shock is not recommended, as it triggers a rise in unemployment and a fall in output, while the effect on the public debt is minor.Practical implicationsPolicymakers should focus their efforts on reducing unproductive government consumption on the expenditure side. Concerning revenues, the reinforcement of tax administration is recommended to ensure that indirect taxes will be collected.Originality/valueThis paper contributes to the existing literature by providing a disaggregated analysis of the effects of fiscal policy actions in Greece by implementing several fiscal policy scenarios and accounting for the level of public debt. All scenarios are in the vein of the economic adjustment programs guidelines.

Monetary versus fiscal policy in India: an SVAR analysis

ABSTRACTConventionally, the policymakers relied on three policy alternatives to manage business cycles – debt-financed government spending, debt-financed tax rebate and interest rate. While the first two are fiscal policy instruments, the latter is a monetary policy instrument. This paper aims to capture interactions among Indian monetary and fiscal policy actions, and the impact of such policy actions on select macroeconomic variables for the period 1990Q1–2011Q4. The policy actions are identified using the sign restrictions approach combined with magnitude restrictions in a Structural Vector Autoregression framework, and interpreted using impulse responses and variance decomposition. The results show that Indian monetary policy responds to tax rebate shocks and spending shocks differently. In the case of a tax rebate shock, Indian monetary policy responds by reducing interest rates thereby accommodating fiscal expansion. On the opposite, monetary policy seems not to accommodate expenditure shocks. Interestingly, the monetary policy shock is accompanied by a fiscal expansion that threatens the credibility of the central bank actions, thus indicating fiscal policy dominance. A comparison of the efficacy of the policies suggests that the interest rate is more effective in stimulating output. Out of the two fiscal policy instruments analysed, the tax rebate seems to be the better option for stimulating output considering the output-debt trade-off.

Monetary policy and leverage shocks

The current mainstream approach to monetary policy in the United States is based on the new Keynesian model and is expressed in terms of the federal funds rate. It ignores the role of financial intermediary leverage (or collateral rates). But as the federal funds rate has reached the zero lower bound, the issue is whether there is a useful role of leverage in monetary policy and business cycle analysis. Motivated by these considerations and by recent financial intermediary asset pricing theories in this paper, we investigate the macroeconomic effects of broker–dealer leverage and the interdependence between monetary policy and broker–dealer leverage in the context of a structural vector autoregression model, using quarterly U.S. data over the period from 1967:1 to 2014:3. We address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short-run and long-run restrictions. We also use the sign restriction approach to the identification of shocks to distinguish between leverage supply and leverage demand shocks, as one would expect the macroeconomic effects of these two types of leverage shocks to be quite different. Our results show that monetary policy and broker–dealer leverage demand shocks produce results that capture reasonable macroeconomic dynamics.

The effects of macroeconomic shocks on the Brunei economy: a sign restriction approach

ABSTRACTThis paper examines the impact of oil price, foreign monetary policy, and domestic government spending shocks on the Brunei economy from 2003Q1 to 2014Q3 based on a structural vector autoregression model with shocks identified using the sign restriction methodology. The results show that an unanticipated oil price decline has a negative effect on government expenditure, and consequently non-oil GDP. Foreign monetary policy shocks also affect the economy through their impact on the interest rate, prices, and the real exchange rate. The procyclical fiscal stance, which exacerbates the business cycle, is an important source of macroeconomic fluctuations. Government expenditure smoothing should be accorded high importance in the conduct of fiscal policy. This could be achieved by using oil reserve funds to finance budget deficits to delink government spending from volatile oil revenue.

Monetary Policy and Leverage Shocks

The current mainstream approach to monetary policy in the United States is based on the new Keynesian model and is expressed in terms of the federal funds rate. It ignores the role of financial intermediary leverage (or collateral rates). But as the federal funds rate has reached the zero lower bound, the issue is whether there is a useful role of leverage in monetary policy and business cycle analysis. Motivated by these considerations and by recent financial intermediary asset pricing theories, in this paper we investigate the macroeconomic effects of broker-dealer leverage and the interdependence between monetary policy and broker-dealer leverage in the context of a structural vector autoregression model, using quarterly U.S. data over the period from 1967:1 to 2014:3. We address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short-run and long-run restrictions. We also use the sign restrictions approach to the identification of shocks to distinguish between leverage supply and leverage demand shocks, as one would expect the macroeconomic effects of these two types of leverage shocks to be quite different. Our results show that monetary policy and broker-dealer leverage demand shocks produce results that capture reasonable macroeconomic dynamics.

Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle

Using a robust sign restrictions approach, we study the response of total factor productivity (TFP) to structural shocks in a VAR framework. We find that TFP increases in response to adverse supply, demand, and wage mark-up shocks. Results for monetary policy shocks are insignificant. Following an adverse technology shock and reductions in government spending, TFP declines. Overall, we conclude that TFP fluctuates endogenously over the business cycle, a feature of the data that is not present in standard DSGE models.

Does Partisan Conflict Impact the Cash Holdings of Firms? A Sign Restrictions Approach

This paper explores how US partisan conflict impacts the cash management decisions of US firms. Using a sign restrictions approach to identify structural shocks to partisan conflict, we find that an exogenous 10% rise in the Partisan Conflict Index above trend is associated with a 0.4 percentage point increase in average cash-to-total assets above trend. These baseline results hold for both the mean and median ratio of cash-to-total assets for all firms in our sample, across the total assets distribution, as well as for different classifications of firms. Additionally, we conduct a series of robustness checks, including a firm-level regression analysis, all of which uphold these results. Our findings reinforce the signalling effect that political dysfunction can have on corporate managers.

Identifying terms of trade shocks in a developing country using a sign restrictions approach

ABSTRACTUsing annual data for Botswana from 1960 to 2012, we examine the responses of macroeconomic variables to four generalized positive terms of trade shocks – global demand, globalizing, sector-specific and global supply. A sign-restricted structural vector autoregression model with a penalty function is estimated to identify the four possible shocks. While positive global demand and globalization shocks are both expansionary, they have opposite effects on inflation. A positive commodity market specific shock dampens real GDP growth and is inflationary, suggesting a possible Dutch disease response. A negative global supply shock suppresses both output growth and inflation. All but the last shock leads to a significant declining interest rate. Monetary policy contraction is recommended for the first shock and expansion for the others.

A Secular Increase in the Equity Risk Premium

AbstractThere is an increasing consensus that global ‘excess saving’ has contributed to a reduction in equilibrium real interest rates. While economists dispute the extent of the decline, few now question that a decline has taken place or that excess saving has played a causal role. A key implication of this narrative is a decline in yields of all assets, including but not restricted to government bond yields. Yet, since the turn of the century, yields on global equity have risen. A complementary explanation is that there has been an increase in the global equity risk premium (ERP), which has simultaneously pushed risk‐free yield curves lower and equity yields higher. Applying a sign restrictions approach, I find that excess savings shocks were the predominant force affecting global real bond yields between the mid‐1980s and 2000 but that ‘risk premium’ shocks have accounted for more of the decline in real bond yields since 2000.