Structural VAR Model Research Articles

Skill bias in the labour market: Evidence from Iran

Purpose ― Most global economies are dealing with the issue of skill bias. In developing and underdeveloped countries, skill bias poses a problem by preventing the educated from participating in the economy's production function, especially in the long run. This paper expands on the skill-wage relationship and investigates this issue in the case of Iran from 1981 to 2021.Methods- Applying Impulse Responses from VECM and the Structural VAR model separates the relationship between skill and wage into short- and long-term effects. The structural wage model was estimated using the structural vector auto-regression model.Findings ― The results show that skill played a significant role in wage determination only for three periods in the short run, and the effect was neutral in the long run. This means that skill accumulation through advancement in graduate and postgraduate study is unlikely to increase wages in the long run.Implication ― According to the findings, skill bias implies that education attainment in the Iranian labour market can only improve wages to a minimum extent. This also proves that factors other than education determine wage growth in the economy. Originality ― The skill-wage relationship has not been a focus of studies in education outcome fields. Moreover, in the case of Iran, this investigation is novel, and there is a lack of studies on the relationship between compensation and skill.

Impact of bank-affiliation on liquidity seeking of foreign mutual funds during adverse shocks: Evidence from China

Using daily shareholding data and event-based measures of composite shocks, we investigate the liquidity-seeking behavior of foreign mutual funds in China that are affiliated with commercial banks, comparing it with the behavior of unaffiliated foreign mutual funds. Fixed effect and panel structural VAR models both reveal differential responses between affiliated and unaffiliated foreign mutual funds. While both types of mutual funds seek liquidity by withdrawing from illiquid, volatile and growth-oriented stocks facing negative shocks, unaffiliated mutual funds exhibit a higher degree of liquidity seeking, consistent with the results of bank-affiliated funds providing liquidity stability. This finding is robust to the selection of shock periods and measurements. The evidence shed new lights on the liquidity management of open-end foreign mutual funds in emerging markets.

Attractiveness of clean energy stocks in Europe

The Ukrainian conflict has put in evidence the need to understand if oil and gas shocks increase the attractiveness of clean energy investments in Europe. If that is the case, clean energy investments are both the solution to the end of the month problem in Europe and to the end of the world problem due to climate change. Using monthly data for the period 2008–2021, we pinpoint supply and demand shocks in the oil and gas markets affecting Europe and investigate their effects on clean energy stock returns using a structural VAR model. We complete the analysis by studying the connection of these shocks with geopolitical risk. Our findings show that, clean energy stocks are positively impacted by a negative shock in the gas supply to Europe but are not significantly affected by a negative shock in global oil supply. Moreover, clean energy stocks are positively influenced both by oil-specific and gas-specific demand shocks. Finally, the favorable impact of economic demand shocks on clean energy returns lasts more in the oil price model than in the gas price model. Regarding geopolitical risk, we find a strong connectedness, particularly with shocks in the European gas market. These findings imply that, in Europe, clean energy is indeed a substitute to oil and gas in times of crisis. We are then likely to observe an increase in clean energy returns as prices of fossil sources spike.

Income inequality, unemployment, and government transfer: what do their dynamics tell us

PurposeIn this research, we explore the dynamics among measures of income inequality in the USA, male and female unemployment rates and growth in government transfer using time series data.Design/methodology/approachThis research adopts a macro-econometric approach to estimate a structural VAR model using time series data.FindingsOur structural impulse responses found that growth in government transfer increases unemployment rates for both males and females. Female income inequality declines with increased government transfer. When the female income ratio rises, we observe that government transfer outlays fall over the forecast horizon. Variance decomposition finds that growth in government transfers is impacted by the male unemployment rate relatively more than the female unemployment rate. This research, therefore, suggests gender-specific government transfers to reduce income inequality. This, in effect, may reduce government transfer outlays over time.Practical implicationsThis research, therefore, suggests gender-specific government transfers to reduce income inequality. This, in effect, may reduce government transfer outlays over time.Originality/valueThis research investigates the dynamics among income inequality, government transfer and unemployment rates. There is a dearth of research articles that adopt a macro-econometric in this area.

The examination of the impact of global uncertainties on developed and developing markets with structural VAR model

This study aims to examine the impact of global uncertainties on developed and developing markets with the help of the Structural VAR model. Due to the integration of financial markets, it is of great importance for securities market investors to be able to predict the direction of the markets. One of the variables to be used to predict the development of financial markets is the MSCI indices. In the study, the Developed Markets Index (MSCIWO) was used to represent developed markets, and the MSCIEF Emerging Markets Index was used to represent emerging markets. In the study, two separate models were established to measure the impact of global uncertainties on developed and developing markets. Using monthly data from 2014-2023, this study identifies differences between developed and emerging markets and shows how these markets react to different types of uncertainty. The results obtained from the study show that the effect of the Global Economic Policy Uncertainty Index (GEPU) variable on developed and developing capital markets is positive in the long term. Additionally, it was determined that the Geopolitical Risk Index (GPR) variable has a long-term negative impact on both markets. Analysis results indicate that the effect of the VIX variable on advanced markets is not significant, whereas it shows a negative impact on developing markets.

Energy shocks in the Euro area: Disentangling the pass-through from oil and gas prices to inflation

We develop a Bayesian Structural VAR model to study the relationship between different energy shocks and inflation dynamics in Europe. Specifically, we model the endogenous transmission from shocks identified by the global market of crude oil and the European natural gas market to two target macroeconomic variables, i.e. inflation expectations and realized headline inflation rate. Our results demonstrate that, since the post-pandemic recovery, inflation in the Euro area is mostly driven by energy price shocks and aggregate supply factors. In particular, the high peaks of the Eurozone inflation are mostly associated with natural gas supply shocks.

ABD Merkez Bankası'nın Para Politikası Kurallarından Sapmaları ve Bunların Yayılma Etkileri

The aim of this study is to examine the impact of the FED's deviations from monetary policy rules on the Turkish economy. In other words, the spillover effect of the FED's monetary policy was examined. The dataset used in the study was divided into two parts as rule-based and discretionary periods with reference to Taylor (2012), and the interaction between the variables was examined using structural VAR models. The results show that deviations from monetary policy rules have quite significant effects on the Turkish economy in the period when the FED is closer to discretionary policy. Considering that the economies of developing countries such as Turkey are more affected by the monetary policies of the FED than the developed countries, it can be said that transparent and predictable monetary policies are an effective tool to be protected from these global effects. In addition, the diversification of the foreign trade portfolio and the strengthening of foreign exchange reserves are also extremely important in making the Turkish economy resilient to the shocks resulting from the FED's monetary policies.

Exchange rate in emerging markets: Shock absorber or source of shock?

This paper examines the stabilization role of flexible exchange rates for emerging economies within the Latin America and Asia regions. Based on a structural VAR model, we utilize zero, sign and exchange rate pass-through restrictions to identify structural macroeconomic shocks. Overall, we find that exogenous exchange rate shocks drive around half of total exchange rate fluctuations in emerging economies. Despite this predominant role, we find evidence that exchange rates do not act as a source of shocks to the real economy, but they instead absorb and reduce output growth and inflation volatilities. Based on counterfactual analyses, we further find that this shock-insulation property is highly shock-dependent, where the benefits of flexible exchange rates are sizable for demand and global monetary policy shocks, but are overall small in the face of supply shocks. Results also differ across time horizons, where the shock stabilization benefits are mainly limited to the short run for output, but also extend to the medium term for inflation. We also find that the net benefits of flexible exchange rates as a shock absorber are in general larger for emerging economies in Latin America than in Asia, particularly during crises periods. Finally, while we find that the stabilization role of exchange rates hinges upon the nature of underlying structural shocks, there is also a positive association with structural determinants such as a country's degree of exchange rate flexibility and trade openness.

China's monetary policy framework and global commodity prices

This paper examines the effects of China's monetary policy on global commodity prices over the quarterly period 1996:Q1–2021:Q4. Using a Bayesian Structural VAR model, we evaluate the impact of interest rate shocks (as a price rule) and shocks to the monetary aggregate (M2) (as a quantity rule) on those commodity prices. Our main findings are fourfold. First, a positive interest rate shock has a negative and persistent effect on commodity prices, with beverages and metals commodity prices falling the most in response to such shock. Second, a positive shock to the growth rate of M2 has a strong impact on the prices of non-fuel commodities, agricultural raw materials, and metals. Still, the highly volatile food and fuel (energy) commodity prices are less affected. Third, while both the growth rate of M2 and the interest rate seem relevant macroeconomic stabilizers, the quantity instrument appears more effective than the price instrument in explaining commodity prices. Finally, while interest rate hikes are linked with a persistent rise in world uncertainty, monetary expansions lead to a long-lived fall in this variable. All in all, our study provides new evidence about the impact of China's monetary policy on global commodity prices using a rich dataset and an econometric setup that accounts for uncertainty.

From oil surges to renewable shifts: Unveiling the dynamic impact of supply and demand shocks in global crude oil market on U.S. clean energy trends

Transitioning to renewable energies has become undeniably important in recent decades, especially for the United States. Oil price shocks are prominent determinants of renewable energy. Hence, this study examines the impacts of oil supply, aggregate demand, and oil-specific demand shocks on renewable energy consumption from 1973:01 to 2021:05 using Structural VAR and Time-Varying Parameter VAR models. Based on the results, oil supply shocks generally have a negligible effect on renewable energy, except those that originate from sharp changes in Saudi Arabian oil production and the U.S. recession-induced oil supply deficit. Aggregate demand shocks, such as those caused by the Persian Gulf War and the Asian financial crisis, negatively affect renewable energy by reducing investments and making oil more affordable. Conversely, oil-specific demand shocks, such as the 1979 Iranian Revolution and the 2008 financial crisis, initially reduce renewable energy attractiveness but ultimately lead to increased renewable energy consumption due to soaring oil prices. This study’s unique approach of separately examining global oil market shocks provides new insights, complementing and extending previous research on the relationship between oil prices and renewable energy consumption. Eventually, policy implications for strengthening incentive policies and adding punitive policies to seeking investment in renewable energy are proposed.

Impact of tax changes on the risk premium of the WIG index

The presented article provides an empirical analysis of changes in the risk premium of stocks on the Warsaw Stock Exchange in response to changes in tax rates. The analysis uses a structural VAR model, identified with sign restrictions. This method turns out simple to use and proves to be effective in overcoming the problem of predictability of fiscal policy, which is especially important in studies using variables from financial markets. The results show an increase in the risk premium following a sudden tax hike, accompanied only by a temporary reduction in GDP growth. Meanwhile, an anticipated tax hike seems to lower risk premia while being more harmful to GDP dynamics.

Balance sheet expansionary policies in the euro area: Macroeconomic impacts and a vulnerable versus non-vulnerable comparison

This paper investigates the impacts and heterogeneity of the ECB's large-scale asset purchasing programs of sovereign securities on real GDP, inflation, long-term sovereign bond yields, systemic stress, and the unemployment rate. A structural Bayesian VAR model with six endogenous variables was estimated for 11 euro area countries over the period 2012:M1 to 2023:M12. To provide robustness to the results, a structural panel BVAR model is estimated, enabling a straightforward comparison of impulse responses of vulnerable and non-vulnerable countries. The results suggest that the magnitudes of impulse responses were more favorable in countries that were more economically and financially vulnerable. These findings underscore that financial and economic distress was a source of heterogeneity in the responses to large scale asset purchases within the euro area.

The impact of fiscal shocks on economic growth and income inequality in Ghana: is there a trade-off?

PurposeThe study examines the impact of fiscal policy shocks on economic growth and income inequality in Ghana. This has become necessary because of the interdependence between growth and income inequality and the role fiscal policy plays in this relationship in the development process of a country. Thus, a study that investigates how government expenditure shock and tax revenue shock influence the relationship between economic growth and income inequality could assist policymakers to adopt the best policy mix to ensure income equity and sustained economic growth in Ghana.Design/methodology/approachIt employs sacrifice ratio from structural VAR model using quarterly time series data from 1996 to 2019 on Ghana.FindingsOur results show that government expenditure shock impacts economic growth, exchange rate and education positively and significantly in the long run. Also, tax revenue shock has a positive impact on income inequality, economic growth and education. The findings further show that there exists a trade-off between economic growth and income inequality in the long run.Originality/valueThe relationships between fiscal policy shocks, economic growth and income inequality have been extensively discussed among scholars. Understanding how these three macroeconomic variables are determined and their interrelationships are crucial for policymakers. This is because fiscal policy aids in both economic growth and income inequality. In the empirical literature, the emphasis has been on independently estimating the growth effects of fiscal policy or the distribution effects of fiscal policy, leaving out the existence of possible trade-off between economic growth and income inequality following a fiscal shock. To the best of our knowledge, no empirical study has been done on Ghana to empirically examine the trade-off between economic growth and income inequality as we do in this paper.

Aid and developing regional integration

This paper examines megatrends and interdependence of the loan aid-capital investment links across developing regions. Theoretically, it contributes to the existing studies by providing a novel theoretical framework with a dual-objective donor-giving grant (driven by a benevolent objective) and loan aid (profitability motive), as well as a public–private partnership-like investment structure and multi-region feedback mechanism. Empirically, this paper adds to the literature by allowing for cross-heterogeneity and interdependencies across regions of loan aid-capital investment link. We estimate a panel structural VAR model of grant aid, loan aid, private consumption, and aggregate capital stock using data from nine developing regional country blocs covering the 1961-2017 period. Amidst a generally weak aid-investment link, we find loan aid to Granger causes capital accumulation, and among African regions, it is the most (least) productive – in terms of within- and spillover effects – in the IGAD (ECOWAS) region. In addition, our results suggest deeper regional integration between the Sub-Saharan African regions than the collective Latin American & Caribbean regions and the two Southern Asian regions (Southeast Asia and South Asia) examined.

Unravelling the credit market shocks and investment dynamics: A theoretical and empirical perspective

This paper investigates the underlying credit market shocks that historically affected business investment in the Slovenian economy. In contrast to the existing literature, we explore more profound structural shocks beneath the credit demand and supply shocks. For the purpose of structural identification, we propose a theoretical model of the credit market that reveals the credit market imperfections on the side of credit supply as well as liquidity demand. The theoretical structure justifies our set of identifying restrictions, further evaluated with the structural Bayesian VAR model. Our results confirm the relevance of loan supply shocks for the business investment activity, suggesting the existence of credit market imperfections. Furthermore, business investment is strongly conditioned by liquidity demand shocks, which explain a significant part of the variation in investment activity. Even though loan supply shocks constrained the investment activity in Slovenia during the financial crisis, the results of our analysis suggest that banks predominantly reacted to the increasing financial risk as opposed to the changes in their profit functions. Based on the results, we may conclude that in the common monetary area, fiscal policy should implement country-specific measures to effectively address the business sector's expectations regarding the economy's medium- and long-term development.

A structural VAR and VECM modeling method for open-high-low-close data contained in candlestick chart

The structural modeling of open-high-low-close (OHLC) data contained within the candlestick chart is crucial to financial practice. However, the inherent constraints in OHLC data pose immense challenges to its structural modeling. Models that fail to process these constraints may yield results deviating from those of the original OHLC data structure. To address this issue, a novel unconstrained transformation method, along with its explicit inverse transformation, is proposed to properly handle the inherent constraints of OHLC data. A flexible and effective framework for structurally modeling OHLC data is designed, and the detailed procedure for modeling OHLC data through the vector autoregression and vector error correction model are provided as an example of multivariate time-series analysis. Extensive simulations and three authentic financial datasets from the Kweichow Moutai, CSI 100 index, and 50 ETF of the Chinese stock market demonstrate the effectiveness and stability of the proposed modeling approach. The modeling results of support vector regression provide further evidence that the proposed unconstrained transformation not only ensures structural forecasting of OHLC data but also is an effective feature-extraction method that can effectively improve the forecasting accuracy of machine-learning models for close prices.

Statistically identified structural VAR model with potentially skewed and fat‐tailed errors

AbstractWe introduce a structural vector autoregressive model in which the mutually independent errors follow skewed generalized t‐distributions, whose flexibility compared with commonly considered Student's t‐distributions diminishes the risk of misspecification and strengthens identification. Because of statistical identification due to non‐Gaussianity, the plausibility of economic identifying restrictions can be formally assessed. In an empirical application, the data support narrative sign restrictions in identifying the US monetary policy shock. In contrast to some of the previous literature, we find a strong negative response of real activity to contractionary monetary policy after a few months' delay.

Assessing the Impact of Fiscal Policy on Economic Growth Rates

Relevance. The Guidelines for Budget, Tax and Customs Tariff Policy for 2024 and for the planning period 2025–2026 show that there will be a significant increase in expenditures for all funds of the Russian budget system. The expenses’ structure is changing significantly: it is expected to shift towards power expenses against the backdrop of a slight reduction in investments in human capital, social policy and the national economy growth. To ensure the budgetary balance required by law, the state predicted an increase in the tax burden in the next three years. This paper attempts to assess the impact of these changes on GDP dynamics. The authors calculated multipliers, including in key functional sections of the budget classification, to assess changes in fiscal policy, tax, and budget expenditure. Methods. We based these calculations on the impulse responses of the structural VAR model of the Russian economy. Also, the authors assessed the model on data for 2004–2021 to reckon the average-sized model (10 indicators) involved having used the Bayesian estimation method. Results. The calculated financial multipliers confirm a significant effect of fiscal policy on GDP; expenditures on social policy and the national economy showed the greatest stimulating effect.

A note on the dynamic effects of supply and demand shocks in the crude oil market

ABSTRACT In this paper, we investigate whether key relations in the crude oil market have been stable over time. This is done by estimating hybrid time-varying parameter structural Bayesian VAR models using monthly data ranging from February 1973 to May 2023. Model selection suggests that while stochastic volatility is preferred over homoscedasticity, the dynamics of the model are best described by constant parameters in all equations.

Effectiveness and conduct of macroprudential policy in Indonesia in 2003–2020: Evidence from the structural VAR models

The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-COVID-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-COVID-19 period.