Supply Shocks Research Articles

The Distribution of Relative Demand and Relative Supply Shocks for Managers Across the U.S. Economy

The Distribution of Relative Demand and Relative Supply Shocks for Managers Across the U.S. Economy

The impact of the global financial crisis and the European sovereign debt crisis on the capital structure of firms in Europe: do SMEs, and listed firms respond the same?

This study examines the evolution of the capital structure of European firms during the global financial crisis and European debt crisis. We compare the experiences of SMEs, listed firms and private firms in different industries and investigate the role of country and institutional factors in affecting capital structure. We find that SMEs, private firms, and non-listed firms experience lower declines in leverage relative to large firms during the global financial crisis and the European debt crisis. During these crises’ periods, SMEs experience steeper declines in debt maturity, which suggests reliance on short term debt that carries high roll over risks. This behaviour is protracted for firms in the agriculture industry. Both the global financial crisis and EU debt crisis have asymmetric effects on leverage, long term debt issuance and debt maturity across different industries, and across firms of different sizes. Moreover, in countries with more developed financial systems, stronger frameworks for insolvency, resolving firm insolvency, and strong systems for shareholder suits, and director liability, SMEs experience much lower reduction in leverage and debt maturity. This finding suggests that institutional factors help attenuate adverse capital supply shocks.

Do bank shocks affect physical or R&D investments more? Evidence from Japan

This study focuses on physical and R&D investments to examine the effect of bank shocks on corporate investment behavior at the firm and economy levels. I use matched bank-firm lending data for listed Japanese companies from 1990 to 2013 to distinguish bank loan supply shocks from firms’ borrowing shocks. Notably, bank concentration increased in Japan during this period, thereby enhancing the granularity of bank shocks. The estimation result of each investment function reveals that bank shocks become highly relevant for firms’ physical investment relative to their R&D investment. Specifically, a negative bank shock of one standard deviation decreases the physical (R&D) investment rate by 12.6% (less than 1%) for firms with the median level of debt ratio. Consistent with this, the economy-level analysis shows that granular bank shocks account for 9.4% of the variation in Japan’s aggregate physical investment but have no explanatory power for the country’s aggregate R&D investment.

Modelling and analysing supply chain disruption: a case of online grocery retailer

Supply Chains (SCs) are becoming more vulnerable to disruption risks because of globalisation, competitiveness, and uncertainties. This study is motivated by an online grocery retailer in the UK that experienced multiple disruption risks, such as demand and supply shocks, facility closures, and disruption propagation simultaneously in 2020. The main purpose of this study is to model and perform quantitative analyses of a range of SC disruption risks affecting the UK online retailer. We have attempted to study how UK retailers responded to the first and second waves of the pandemic and the effect on multiple products. Six scenarios are developed based on SC disruption risks and their impacts on SC performance are analysed. The quantitative analysis of two strategies used by grocery retailers during the pandemic, namely vulnerable priority delivery slots and rationing of products, illustrates that rationing of products had a greater SC impact than the use of priority delivery slots. The effects of two resilience strategies, backup supplier and ramping up distribution centre capacity, are also quantified and discussed. Novel managerial insights and theoretical implications are discussed to make online grocery SC more resilient and robust during future disruptions.

Global energy market connectedness and inflation at risk

After the outbreak of COVID-19 and the Russia–Ukraine war, historically high inflation has become a problem that plagues many countries, leading researchers to model and explore inflation dynamics from a conditional mean-based perspective to a conditional quantile-based perspective and examine the inflation distribution’s tail characteristics, also known as inflation-at-risk. Given the rising uncertainty in the global energy market during COVID-19 and large-scale energy supply shocks brought about by the Russia–Ukraine war, this paper first extracts the global energy connectedness index (GECI) based on the MSCI energy index of 29 countries, then incorporates GECI into the quantile regression to characterize the dynamic distribution of inflation. The results show that the predictive effect of GECI on short-, medium-, and long-term inflation dynamics is mainly reflected in upper quantiles of inflation, with heterogeneity across countries. We find that the dynamic distributions of inflation under the impact of major global events are skewed, and there are significant changes in inflation risks. The out-of-sample forecast verifies the validity and forward-looking property of GECI. The results provide practical regulatory tools and decision-making suggestions for policymakers to prevent and respond to high and low inflation risks.

The impact of supply chain disruptions on business expectations during the pandemic

Utilizing the Federal Reserve Bank of Atlanta’s Business Inflation Expectations (BIE) survey, which has been continuously collecting subjective probability distributions over own-firm future unit costs since October 2011, we document two facts about firms’ marginal cost expectations and risk during the COVID-19 pandemic. First, in the early months of the pandemic, firms, on net, saw COVID-19 largely as a demand shock and lowered their one-year ahead expectations. However, as the pandemic wore on, firms’ one-year ahead unit cost expectations rose sharply alongside their views on supply chain and operating capacity disruptions. Second, the balance of unit cost risks shifted sharply over the course of the pandemic and by the end of 2022, upside risks had sharply outweighed perceived downside risks over the year ahead. We find that both positive demand shocks (e.g. large order backlogs) and negative supply shocks (e.g. long supplier delivery times and labor shortages) have contributed to elevated short-term unit cost expectations and risk. Specifically, supply shocks accounted for roughly 40% of the increase in manufacturers’ and nearly one-third of service-providers’ unit cost expectations.

Inflation dynamics: a traditional perspective

Abstract We derive a traditional Phillips curve (TPC) under the assumption that a fraction of firms sells output at optimal prices, while the other fraction sells at contract prices. Our derivation delivers a pricing mechanism where inflation depends on expected inflation and the real optimal price, which is the real marginal cost. The parameters of this Phillips curve have a clear structural interpretation in much the same way as its new Keynesian counterpart.. Using a Leontief-type technology, our baseline TPC features expected inflation, the labour share, demand pressure and a vector of supply shocks. We estimate this TPC for five developed and five emerging market economies and find that the degree of price rigidity is significant and correctly signed in most of the economies. We conclude that this TPC is a credible rival to its forward-looking new Keynesian counterpart.

Oil price shocks and stock–bond correlation

This paper investigates the role of oil as a determinant of the US stock–bond correlation. The analysis uses monthly data over the period from February 1990 to July 2021. We examine the impact of oil shocks, using the Ready (2018) method, alongside a range of macroeconomic variables on the nature of stock–bond dynamic correlation. Our main findings demonstrate that during recessionary periods, the stock–bond correlation is adversely and statistically explained by oil supply shocks, and that correlation tends to statistically diverge from that of it is counterpart during expansionary periods. In addition, demand shocks are more pronounced in periods of pessimistic investor sentiment, whereas supply and risk shocks appear during optimistic periods. From a risk management standpoint, a backtesting exercise shows that the incorporation of supply and demand shocks generally improves the forecast of portfolio volatility under various portfolio weighting schemes and market conditions. A time-varying hedging exercise also reveals that accounting for both demand and supply shocks reduces the cost of hedging, mainly following major crisis periods. The contribution of shocks appears most with a long position in the bond market after the 2014 oil crisis period. Our main results remain the same after performing a set of the robustness checks.

The Asymmetric Effect of Credit Supply on Firm‐Level Productivity Growth

AbstractWe study the impact of bank credit on firm productivity. We exploit a matched firm‐bank database, covering all the credit relationships of Italian corporations, to measure idiosyncratic supply‐side shocks to credit availability and estimate a production model augmented with financial frictions. We find the effect of credit supply to be asymmetric: contractions harm TFP growth, halting productivity‐enhancing activities; positive credit supply shocks have limited effects. This points toward a role of financial stability in preserving productivity growth.

The Comovement Between Forecast Errors for Real GDP and Its Deflator in Six OECD Countries: Did Supply Shocks Become Less Dominant During the Great Moderation?

The Comovement Between Forecast Errors for Real GDP and Its Deflator in Six OECD Countries: Did Supply Shocks Become Less Dominant During the Great Moderation?

What is the role of perceived oil price shocks in inflation expectations?

Not much. We identify the perceived oil price shock, as well as perceived global demand and supply shocks, using sign restrictions in a factor-augmented vector autoregression model that includes forecasts for crude oil price growth, real GDP growth, and inflation across 84 economies. The perceived oil price shock explains only 10% of the fluctuations, on average, in global inflation expectations from January 2012 to December 2022, and accounts for an even smaller fraction during the COVID-19 pandemic. Allowing for the oil price noise shock – reflecting exogenous shifts in agents’ optimism and pessimism – does not materially change the limited pass-through of the perceived oil price shock to inflation expectations. In contrast, perceived global supply and demand shocks dominate, especially since the onset of the pandemic. Over the first eight months, professional forecasters viewed the pandemic, on net, as a negative demand shock and lowered their short-term inflation expectations. In early 2021, professionals quickly switched their views and sharply increased their inflation expectations amid burgeoning and persistent supply chain disruptions and labor constraints.

The Impact of Gross Domestic Product Response to the Money Supply Shock in the Iraqi Economy for the Period (2004-2021)

The research aims to clarify the response of the GDP to the M1 shock. It includes access to the results using standard methods, where the standard model was built according to quarterly data using the program STATA 17. According to the joint integration model ARDL, the research found a long-term equilibrium positive for the relationship between GDP and the money supply in Iraq, as the change in the money supply by a certain percentage will lead to a change in GDP by about 71% of that percentage. In the event of a shock in the Iraqi economy, the impact of the M1 will differ from what it was before the shock, as the shock will increase its effectiveness towards GDP by about 10% more than before the shock. At the same time, the relationship between them remains positive. One of the most important recommendations is to work to achieve a proportional balance between the money supply and GDP. This is done through the control of monetary policy to reach a real balance between the monetary and commodity sectors. It contributes to addressing the chronic imbalances of most economic sectors, especially in productivity and its vulnerability to monetary economic shocks.
 Paper type: Research paper.

Stock Returns and State-Dependent Effects of Changes in Exchange Rate and Money Supply from Central Banks

This study investigates the state-dependent effects of exchange rate movements and money supply shocks on stock market returns using daily stock returns, exchange rate, and variations in money supply data obtained from the databank.worldbank.org website from 1990 to 2022. The stock markets of ten emerging and developed countries were used in the study. The Markov-Switching regression methodology was utilized for this study. The results suggest that for the developed stock markets, in Regime 1, a positive shock to the money supply stimulated a significant rise in the stock returns while in Regime 2, a positive shock to the money supply induced a drop in returns. This suggests that for the developed stock markets, the effect of money supply shock on returns is state-dependent. In the developing stock markets, the coefficient for exchange rate was negative and significant in Regime 1, while it was insignificant in Regime 2. Therefore, the effect of exchange rate on returns is state-dependent in developing countries. Also, the coefficient for volatility in the exchange rate was negative and sizable in both regimes, indicating that the returns effect of volatility is not state-dependent. Basically, each day the exchange rate appreciates, stock returns rises in the developed stock markets while a devaluation policy executed in developing countries stimulated some decline in returns of emerging markets. In both regimes, a rise in money supply shock had positive and significant returns. The effect of money supply on stock returns is not state-dependent. Consequently, developing countries need flexible approaches to managing the variations in the exchange rates and money in circulation. While policymakers in developed markets may need to focus more on reducing volatility rather than adjusting exchange rates to influence stockpiling, those of emerging countries could benefit more from policies that stabilize exchange rates.

Decomposed oil price shocks and GCC stock market sector returns and volatility

This study investigates dynamic mean and tail-based connectedness between decomposed oil price shocks (demand shock, supply shock, and risk shock) and Gulf Cooperation Council (GCC) stock returns and volatility at the aggregate and sectoral levels of stock data. The sample period is January 13, 2012 - January 14, 2022, covering calm and turbulent periods. The results of mean-based connectedness show generally low levels of connectedness over the full sample period for both return and volatility, despite some time-variation and irregularity in the patterns of connectedness across stock sectors. Total, directional, and pairwise connectedness measures surge significantly during Phase 1 of COVID-19, highlighting the pandemic's influence on the oil shocks–GCC stocks nexus. However, Phase 2 of COVID-19 displays a gradual reduction in return and volatility connectedness, which could be attributed to fiscal stimulus and COVID19 relief packages adopted by policymakers to contain the adverse impact of the virus on the economy. Quantile-based connectedness measures reveal evidence of heterogeneity in the impacts of oil shocks across the various quantiles of stock sector returns and volatility. Unlike supply shock, demand shock is a net transmitter of spillovers, irrespective of the quantiles. Volatility connectedness is stronger at the high volatility state than the moderate and low volatility states for all sectors, but strongest for the industrials sector. The results indicate that modelling oil shocks and GCC stock sector returns and volatility should concentrate on the most influential oil shocks (e.g. demand shock) affecting the lower and upper quantiles of sector returns and upper quantiles of sector volatility, especially for the industrials. The findings have implications for improving portfolio risk management and regulatory procedures, which should be necessary to address spillover effects from decomposed oil shocks in the stock markets of oil-exporters such as GCC countries.

The impact of money supply on the real sector during the Covid-19 pandemic: Evidence from OECD countries

Declared as a pandemic on March 11, 2020, COVID-19 caused a “sudden stop” in the world economy, resulting in both supply and demand shock. Most of the countries responded by monetary expansion to tackle the global economic issue. In this study we aim to find the impacts of these economic policies during COVID 19 on global economy. Our sample includes 33 of OECD countries. We estimate the impact of monetary expansion on the real economy with a linear regression model. The results show that the monetary policy has positively and significantly impacted economic growth even after controlling for fiscal policies.

On the transmission of oil supply and demand shocks to CO2 emissions in the US by considering uncertainty: A time-varying perspective

In an economic context increasingly governed by structural changes, crises, and uncertainty, our understanding of the transmission of oil price shocks to real economic activity and the resulting effects on CO2 emissions is found to evolve over time. Our understanding is also found to evolve when considering the sources of oil price fluctuations as emanating from the supply or demand side. So far, there is still few answers provided by the literature on how economic and policy uncertainty influences the response of CO2 emissions to different sources of oil price shocks. This paper tries to investigate this ‘missing link’ by estimating the time-varying transmission of oil supply and demand shocks to CO2 emissions in the US, while considering the simultaneous effect of uncertainty. Using monthly data covering a period including the Covid-19 health crisis, a two-step estimation procedure is adopted: before constructing a time-varying parameter structural vector autoregression model with stochastic volatility (TVP-SVAR-SV), a structural VAR model (SVAR) is implemented to decompose oil price shocks in four structural shocks namely: oil supply shock, aggregate demand shock, domestic demand shock and oil-specific demand shock. Estimation results and robustness tests show that the level of uncertainty shapes the transmission of oil price shocks to CO2 emissions. Oil supply and oil-specific demand shocks impact negatively CO2 emissions mostly when uncertainty is low. A high uncertainty level leads to a perverse positive impact of aggregate demand shocks on CO2 emissions. Interestingly, CO2 emissions are found to increase during low levels of uncertainty in response to domestic demand driven oil price shocks. This finding may be due to the expansive economic policies enforced to decrease uncertainty and increase consumption in reaction to domestic demand shocks. These results imply that workable solutions targeting an optimal level of CO2 emissions should not only consider different sources of oil price fluctuations but also the level of uncertainty. Discarding the level of uncertainty may lead to a sub-optimal calibration of the regulatory and fiscal measures aiming to protect the environment against different sources of oil price shocks and to adapt these measures to the time horizon of carbon emissions responses.

Early warning of exchange rate risk based on structural shocks in international oil prices using the LSTM neural network model

The Russia–Ukraine conflict has caused an external shock to the oil market as the exchange rate risk increased with significant depreciation of major currencies relative to the U.S. dollar (USD). In this paper, structural shocks to oil prices calculated by the Ready (2018) method are introduced in addition to traditional exchange rate predictor variables such as oil prices. Utilising a long short-term memory neural network model, we verify the early warning effect of structural shocks to international oil prices on exchange rate risk in the context of the Russia–Ukraine geo-conflict. We have several empirical findings. First, the variance decomposition method indicates that oil price shocks affect the euro-dollar exchange rate risk. After the conflict between Russia and Ukraine, the euro exchange rate risk continued to rise significantly, mainly affected by supply shocks. Second, compared with traditional prediction models, the LSTM neural network model has a higher prediction accuracy, which is conducive to improving the early warning performance of exchange rate risks and maintaining the stability of the foreign exchange market. Third, the introduction of oil price shock can fully extract and use the information from oil price changes, which significantly improves the learning performance of the oil price early warning model of exchange rate risk. Fourth, the introduction of oil price risk shocks in the whole sample, the introduction of oil price demand shocks before the Russia-Ukraine conflict, and the introduction of oil price supply shocks, especially negative supply shocks, after the conflict between Russia and Ukraine, can warn exchange rate risks more effectively. This study proposes a new method for early warning of exchange rate risk that can help cross-border enterprises and government policymakers to respond to unexpected events and effectively mitigate associated risks.

Dynamic linkage between oil shocks and economic growth: New evidence from Alaska

The long- and short-run impacts of oil supply and demand shocks on economic growth are investigated for Alaska. The responses to positive and negative oil shocks are allowed to be asymmetric. The structural VAR as well as ARDL/NARDL techniques are considered. We discover that oil supply and demand shocks are significant forces affecting Alaska’s growth in the short run, but not in the long run. We also reveal no evidence of asymmetric effects in both the short and long run.

A new look at the crude oil shocks and trade nexus: Evidence from bilateral trade between Korea and its three largest partners

This article examines the impact of oil supply, global demand, and oil-specific demand shocks on Korea's exports to and imports from its three largest partners: China, the United States, and Japan. We also account for world trade uncertainty in our analysis. Our findings shed light on the complex dynamics of oil price shocks, highlighting the importance of shock type, trading partners, and timing in determining their effects on Korea's trade. Moreover, we identify the significant role of world trade uncertainty in explaining short-term fluctuations in Korea's exports to its top three partners. These insights have substantial implications for trade modeling and policy analysis.

Drivers of inflation in the Greek economy

One of the hallmark achievements of modern central banking has been to quell high inflation. However, after over two decades of low inflation, a series of shocks, including the pandemic recession, supply bottlenecks, highly accommodative policy, and, perhaps most saliently, the war in Ukraine, have led to multi-decade inflation highs across most advanced economies. Understanding the ultimate causes of this inflation surge is vital for the proper design of policy, yet disentangling the various shocks is hard, particularly when they affect prices in the same direction. In this paper, we apply the novel shock decomposition framework of Shapiro (2022) to Greek data and estimate the contribution of supply and demand shocks to inflation developments over the recent episode, as well as for the 2001-2019 period. For the recent episode, we find that supply forces were slightly more important for headline inflation, but much more important for underlying inflation.