Supply-side Effects Research Articles

Drivers of Global Trade: A Sector-Level Investigation

This paper investigates the drivers of global trade at the six-digit product level. The identification is achieved first by estimating the log-linear product-level bilateral trade implications of a model and second by aggregating the fitted estimation results across bilateral countries using Taylor series to obtain global measures in levels for each product. The empirical results suggest that supply-side effects (capturing production or exporting costs in source countries) contribute to changes in global trade more than six times the demand-side effects (capturing economic activity or preferences in destination countries) and more than ten times the effects of bilateral trade costs (capturing bilateral protectionism measures). Several product-level implications follow.

Risk-premium shocks and the prudent exchange rate policy

Using a medium-size New Keynesian open economy model, we examine the issue of a prudent exchange rate policy when the economy encounters an adverse risk-premium shock. We show that the shock leads to terms of trade (ToT) deterioration and an increase in both the aggregate output and inflation. While examining the choice of an appropriate exchange rate policy to deal with the effects of the shock, analytical results of our baseline model show that neither a fully flexible nor a fully pegged exchange rate policy can yield the desired outcome. In the absence of the supply-side effects of ToT and a cost channel of monetary policy, a managed exchange rate policy can stabilize both domestic inflation and aggregate output. However, in the presence of either a cost channel of monetary policy or supply-side effects of the ToT or both, the central bank faces a trade-off between aggregate output and domestic inflation stabilization. We find that the presence of a cost channel of monetary policy gives rise to a pro-cyclical exchange rate policy. Simulation of a more general model suggests that, instead of using the conventional Taylor rule, the central bank should follow a ToT-augmented Taylor rule, which involves further monetary tightening as the ToT deteriorates. We find that the need for monetary tightening is linked to both the nominal and real rigidities in economy, which gives rise to increased exchange rate volatility. We also briefly consider the case of a productivity shock.

Cyclical Labor Market Policy Adjustments Under Wage Bargaining

This paper analyzes the optimal cyclical behavior of labor market policies in an economy with asset and labor market frictions. The policies of interest include unemployment insurance (UI) and employment protection (EP). In addition to their supply-side effects, labor market policies affect the aggregate demand via earning risk and redistribution channels. Under bilateral wage bargaining, I find that procyclical UI and countercyclical EP deliver superior welfare outcomes through stabilization via both supply and demand channels.

Supply-side Effects of Pandemic Mortality: Insights from an Overlapping-generations Model

Abstract We use an overlapping-generations model to explore the implications of mortality during pandemics for the economy’s productive capacity. Under current epidemiological projections for the progression of COVID-19, our model suggests that mortality will have, in itself, only small effects on output and factor prices because projected mortality is small in proportion to the population and skewed toward individuals who are retired from the labor force. That said, we show that if the spread of COVID-19 is not contained, or if the ongoing pandemic were to follow a mortality pattern similar to the 1918–1920 Great Influenza pandemic, then the effects on the productive capacity would be economically significant and persist for decades.

Demand-side or supply-side stabilisation policies in a small euro area economy: a case study for Slovenia

In this paper we analyse the effectiveness of demand- and supply-side fiscal policies in the small open economy of Slovenia. Simulating the SLOPOL10 model, an econometric model of the Slovenian economy, we analyse the effectiveness of various categories of public spending and taxes during the period 2020 to 2030, assuming that no crisis occurs. Our simulations show that those public spending measures that entail both demand- and supply-side effects are more effective at stimulating real GDP and increasing employment than pure demand-side measures. This is due to the fact that supply-side measures also increase potential and not only actual GDP. Measures which foster research and development and those which improve the education level of the labour force are particularly effective in this respect. Employment can also be stimulated effectively by cutting the income tax rate and the social security contribution rate, i.e. by reducing the tax wedge on labour income, which positively affects Slovenia’s international competitiveness. Successful stabilisation policies should thus contain a supply-side component in addition to a demand-side component. We also provide a first simulation of potential effects of the Covid-19 crisis on the Slovenian economy, which is modelled as a combined demand and supply shock.

Fossil fuel energy and environmental performance in an extended STIRPAT model

Recent reports by the Intergovernmental Panel on Climate Change (2018 and 2019) have revealed that world’s human activities have contributed to around 1°C of global warming above the pre-industrial levels (expected to reach 1.5°C between 2030 and 2052) with the burning of fossil fuel contributing to over three-quarters of world’s emissions. Rising demand for energy is expected to add another 39 billion tonnes of carbon-dioxide, threatening the climate action plan of achieving net-zero by 2050. Given the expected worsening of emissions from fossil fuels’ burning, this paper’s main objective is to empirically examine the supply-side effect of energy generation from fossil fuels (coal, natural gas and oil) on environmental quality. In doing so, an extended Stochastic Impacts by Regression on Population Affluence and Technology (STIRPAT) model is adopted that controls for a range of economic, social and institutional factors. The panel data estimation technique is applied to the model that includes a balanced panel of 59 countries using coal, 77 countries using gas and 96 countries using oil for 2002 to 2016. The results revealed coefficient coal is negative and statistically significant at the 1 per cent level (α = −0.052 with ρ = 0.01) and oil is negative and statistically significant at 5 per cent level (α = −0.020 with ρ = 0.05). These results support supply-side energy generation through the burning of coal and oil as vital contributors to environmental quality degradation. Other than confirming the Environmental Kuznets Curve (EKC) effect, forest cover, schooling, the rule of law and nations commitments to international environmental treaties are other strong correlates of environmental performance. The findings also revealed strong adverse effects of agriculture and industrial intensification on environmental quality. The main conclusion is the urgency for the worlds fossil fuel energy-dependent countries to transit from fossil fuel energy to the production of frontier renewable (cleaner forms) sources of energy to minimise degradation of the environment. Other than exploring supply-side carbon mitigation policies, there is a need for active co-operation of all countries of the world in the enforcement of international treaties to minimise further environmental damage.

Meeting Challenges in Forestry: Improving Performance and Competitiveness

Improving the efficiency of the forestry sector will have an important impact on our possibility to attain long-term sustainability and mitigate climate change. In this study, attainable, and sustainable, efficiency improvements in the harvesting of forest products are analyzed using Data Envelopment Analysis (DEA). The price impacts of the efficient harvesting volumes are evaluated in a second step using a spatial forest sector model. The results indicate that the harvested volumes of forest products, both for the industry and energy sectors, can be significantly increased if a more efficient forest management is adopted. This supply-side effect will also result in general price decreases for sawlogs, pulpwood, fuelwood and harvesting residues. However, in certain counties, and for specific forest products, the estimated decreasing price effect from a more efficient forest management cannot fully offset the increasing price effect of the energy sector expanding its use of forest products. More forest biomass enters the market, which is needed in the transition towards a bioeconomy, and the increased availability of forest biomass will restrict the price effect making investments in the bioeconomy more likely to be profitable.

Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability

This paper investigates the implications of strategic fiscal-monetary policy interactions on the policy mix and coordination in a monetary union under imperfect policy instrument substitutability. We develop a model that incorporates the key features of the New-Keynesian framework augmented by a cost channel of monetary policy. Both policy instruments can directly affect inflation, hence having supply-side effects, too. We consider alternative strategic and fiscal regimes. We show that relative policy effectiveness and the cost-channel effect together define policy-mix outcomes, policies’ cyclicality, and coordination problems. The cost channel limits union-wide demand shocks’ stabilization, the monetary authority can no longer manage the cycle, and cooperation and commitment irrelevance do not hold anymore. The lead authority reacts to the follower authority's reaction parameter, hence to the follower's preference parameter, while it might choose not to trade-off its objectives. In the leadership strategic regimes for demand-side policy instruments, the leader reacts positively/negatively to the follower's preference parameter, if its instrument is more/less effective in stabilizing inflation (relative to aggregate demand) than the follower's policy instrument.

Military Spending and Employment

ABSTRACT This paper constructs a theoretical model involving supply-side effect, demand-side effect, and security effect produced by military spending to explore the effects of military spending and foreign military threat on employment. This paper proves that the relationship between defense burden and employment is nonlinear (i.e., reverse U shape.). Hence, we find the defense burden of maximizing employment. In addition, we argue that a rise in foreign military threat will be detrimental to the level of output and in turn lead to a reduction in employment. Finally, we show that an increase in the variance of the foreign military spending shocks will raise the level of output and then lead to an increase in employment.

Wages, Income Distribution and Economic Growth: Long-Run Perspectives in Scandinavia, 1900–2010

ABSTRACT This article views analysis of the influence of capital–labour income distribution on economic growth from a historical perspective, using data from 1900 onwards. We study the three Scandinavian countries of Sweden, Denmark and Norway, where conventional accounts of the postwar growth miracles in these small, open economies have emphasized the role of wage restraint, favouring profits and investment over consumption. Instead, we show that the 1950s and 1960s saw growing wage shares, and use the Bhaduri–Marglin model to econometrically analyse the effects on consumption, investment, exports and imports and the total effects on GDP. Furthermore, we estimate the effects of wage pressure on labour productivity. Growing wage shares have had a small positive effect on GDP growth in Sweden, Denmark and Norway, and the positive effect was larger in the postwar period than in other times. However, the positive growth effects of wage pressure were modest as the demand was only weakly wage-led. In contrast, supply side effects were large. Labour productivity was stimulated by vigorous wage increases, as argued by the Swedish Rehn–Meidner model as well as by post-Keynesian economists. The present investigation opens several further avenues for research on the distribution–growth nexus.

Forward to the Past: Short-Term Effects of the Rent Freeze in Berlin

In 2020, Berlin enacted a rigorous rent-control policy: the “Mietendeckel” (rent freeze), aiming to stop rapidly growing rental prices. We evaluate this newly enacted but old-fashionably designed policy by analyzing its immediate supply-side effects. Using a rich pool of rent advertisements reporting asking rents and comprehensive dwelling characteristics, we perform hedonic-style Difference-in-Difference analyses comparing trajectories of dwellings inside and outside the policy’s scope. We find no immediate effect upon announcement of the policy. Yet advertised rents drop significantly upon the policy’s enactment. Additionally, we document a substitution effect affecting the rental markets of Berlin’s (unregulated) satellite city Potsdam and adjacent smaller municipalities. On top, the supplemental quantity analyses reveal a stark reduction of the number of advertised rental units hampering a successful housing search for newcomers, (young) first-time renters and tenants aiming for a different housing opportunity.

Forward to the Past: Short-Term Effects of the Rent Freeze in Berlin

In 2020, Berlin enacted a rigorous rent-control policy: the “Mietendeckel” (rent freeze), aiming to stop rapidly growing rental prices. We evaluate this newly enacted but old-fashionably designed policy by analyzing its immediate supply-side effects. Using a rich pool of rent advertisements reporting asking rents and comprehensive dwelling characteristics, we perform hedonic-style Difference-in-Difference analyses comparing trajectories of dwellings inside and outside the policy’s scope. We find no immediate effect upon announcement of the policy. Yet advertised rents drop significantly upon the policy’s enactment. Additionally, we document a substitution effect affecting the rental markets of Berlin’s (unregulated) satellite city Potsdam and adjacent smaller municipalities. On top, the supplemental quantity analyses reveal a stark reduction of the number of advertised rental units hampering a successful housing search for newcomers, (young) first-time renters and tenants aiming for a different housing opportunity.

A Structural Investigation of Quantitative Easing

Did the Federal Reserves' Quantitative Easing (QE) in the aftermath of the financial crisis have macroeconomic effects? To answer this question, the authors estimate a large-scale DSGE model over the sample from 1998 to 2020, including data of the Fed's balance sheet. The authors allow for QE to affect the economy via multiple channels that arise from several financial frictions. Their nonlinear Bayesian likelihood approach fully accounts for the zero lower bound on nominal interest rates. They find that between 2009 to 2015, QE increased output by about 1.2 percent. This reflects a net increase in investment of nearly 9 percent, that was accompanied by a 0.7 percent drop in aggregate consumption. Both, government bond and capital asset purchases were effective in improving financing conditions. Especially capital asset purchases significantly facilitated new investment and increased the production capacity. Against the backdrop of a fall in consumption, supply side effects dominated which led to a mild disinflationary effect of about 0.25 percent annually.

Macroeconomic conditions and the determinants of commercialisation

In this paper, we focus on the effects of macroeconomic conditions on commercialisation. Using survey data on the activities of Australian inventors who attempted to commercialise 3,736 inventions over the period 1986-2005, we find evidence that macroeconomic conditions have a pro-cyclical effect on commercialisation activities. Such a finding has important policy implications since it suggests that recessions have both short-term effects (on employment, income) and long-term effects (on productivity). However, the magnitude of the supply-side effects – the cost of finance and level of public sector research – are estimated to be larger than the growth in aggregate or industry demand

Monetary Transmission Mechanism, Confidence and Uncertainty: Evidence from a Large Emerging Market Economy

After the Global Financial Crisis, the role of uncertainty in driving optimal responses of consumers, firms and policymakers has garnered a renewed focus. In the face of uncertainty, economic agents awaiting information and clarity on future outcomes, may delay their economic decisions. Monetary policy aimed at business cycle stabilization may be rendered ineffective in such situations. We test this hypothesis for a large emerging market economy by analyzing the confidence channel of monetary transmission in India. Using a flexible, local projections-based framework, we find that uncertainty shocks resemble a negative supply shock, contrary to evidence from the developed world. This dominant supply-side effect of uncertainty is crucial in understanding the ineffectiveness of monetary policy transmission once macroeconomic uncertainty is accounted for. An unanticipated increase in uncertainty hinders private investment thereby eroding the productive capacity of the economy. This worsens the inflation-output tradeoff for monetary policy. The weaker monetary policy transmission is corroborated by a non-linear threshold model. Episodes of increased uncertainty may, therefore, require unconventional policy tools for effective management. Our findings are useful for monetary policy in an emerging economy given its objective to maintain price stability and optimize on economic growth.

The Supply-Side Effects of Monetary Policy

The Supply-Side Effects of Monetary Policy

Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy

It has been widely debated what a central bank should do to stimulate the economy when the nominal interest rate is at the zero lower bound (ZLB). The optimal monetary policy literature suggests that monetary policy inertia, i.e., committing to continue a zero interest regime even after the ZLB is not binding, is a way to get the economy out of recession. In this paper, I examine whether this result holds when monetary policy has not only the conventional demandside effect but also a supply-side effect on the economy. To accomplish this objective, I incorporate the cost channel of monetary policy into an otherwise standard new Keynesian model and evaluate the optimal monetary policy at the ZLB. The study reveals several important insights in the conduct of the optimal monetary policy in a cost channel economy at the ZLB. Importantly, the discretionary policy requires central banks to keep interest rates at the ZLB for longer in a cost channel economy compared to no-cost channel economies. Further, cost channel economies introduce a policy trade-off between inflation and output gap. In contrast, under commitment policy, the simulation exercise shows that the central bank is able to terminate the zero interest rate regime earlier in a cost channel economy than otherwise. It is also revealed that the cost channel generates substantially high welfare losses, under both discretionary and commitment policies. Accordingly, abstracting the cost channel in these types of models can lead to under estimation of welfare losses.

IMMIGRATION, ENDOGENOUS SKILL BIAS OF TECHNOLOGICAL CHANGE, AND WELFARE ANALYSIS

This paper investigates the long-run effects of immigration on wages and welfare in a model with endogenous technology choice (ETC) where firms are allowed to choose their optimal skill intensity from a menu of available technologies. I embed the ETC framework into the Auerbach and Kotlikoff model (1987) that features a large set of overlapping generations, a rich collection of population dynamics, and a social security system. I calibrate the model to match with the U.S. data and evaluate the effect of ETC with the help of two experiments. In the first experiment, I increase the share of high-skilled immigrants and compare the wage and welfare predictions of the model with ETC to a standard model where the skill intensities in production technology are fixed. In the standard model, since the skill intensities are constant, increase in the supply of high-skilled labor leads to a decrease in high-skilled wages and an increase in low-skilled wages. On the other hand, in the model with ETC, negative supply-side effects are counterbalanced by an increase in the intensity of the more abundant high-skilled labor, leading to a smaller decrease in their wages. The discrepancy between wage predictions of these two models is also reflected in the welfare: while the model with ETC predicts an increase in both high- and low-skilled natives’ welfare, the standard model would predict a decrease in the welfare of the high skilled and a larger increase in the welfare of the low skilled. In the second experiment, I examine the effects of an increase in low-skilled immigration and find that in this case, since the initial production technology is low-skilled intensive, the ETC effects are smaller. These results imply that if ETC is ignored, both in the short run and long run, wage and welfare analyses of immigration will be incomplete, and even misleading.

Do Suspense and Surprise Drive Entertainment Demand? Evidence from Twitch.tv

We measure the relative importance of suspense and surprise in the entertainment preferences of viewers of Twitch.tv, the largest online video game streaming platform. Using detailed viewership and game statistics data from broadcasts of tournaments of a popular video game, Counter-Strike: Global Offensive (CS:GO), we compute measures of suspense and surprise for a rational Bayesian viewer. We then develop and estimate a stylized utility model that underlies viewers' decisions to both join and to leave a game stream. Our method allows us to causally identify the direct effect of suspense and surprise on viewers' utilities, separating it out from other sources of entertainment value (e.g. team skill) and from indirect supply-side effects (e.g. advertising). We find that suspense enters a viewer's utility, but provide little evidence of the effect of surprise. The magnitudes simply that a one standard deviation increase in round-level suspense decreases the probability of leaving a stream by 0.2 percentage points. We fi nd no detectable effect of suspense and surprise on the decision to join a stream, ruling out indirect effects. Variation in suspense levels explains 8.1% of the observed range of the evolution of a stream's viewership. Finally, we evaluate several rule changes in the design of the CS:GO tournaments, and show that making team win probabilities more homogenous will make games longer and more suspenseful, increasing viewership. Together, these results illustrate the value of our method as a general tool to be used by content producers and platforms to evaluate and design media products.

Buy-to-Rent Investors and the Market for Single Family Homes

We examine the impact of house purchases by large buy-to-rent investors on local real estate markets. First, we present micro-level evidence of positive externalities from institutional entry. We show that returns on repeat sales of properties near purchases by buy-to-rent investors are significantly greater if the repeat sale concluded after the buy-to-rent purchase rather than before. Secondly, we highlight the potential channel underlying such an externality as a supply side effect. Specifically, we show that properties outside the price range normally paid by buy-to-rent investors experienced smaller gains after nearby buy-to-rent purchases. Thus, buy-to-rent investors appear to increase the value of properties in an area by reducing the local supply. Lastly, we document mortgage market effects due to institutional purchases and related supply effects. We show that mortgage use increased after the buy-to-rent purchases of nearby properties and that the increase arises from existing lenders that operate in the market rather than new lenders entering the market.