Supply-side Shocks Research Articles

Distinct clubs or one big party? Global value chain convergence: Supply concentration and susceptibility to supply shocks

Research background: Recent events, such as the COVID-19 pandemic or Russia’s aggression on Ukraine, raise important questions about the stability of supply chains and their resilience to supply shocks. Purpose of the article: This paper investigates convergence clubs in global value chains, focusing on supply concentration measured with the Herfindahl-Hirschman Index. Methods: Using country-sector pairs from the OECD’s ICIO database, we employed the Phillips-Sul (2007) algorithm with the Schnurbus-Haupt-Meier (2017) augmentation to distinguish convergence clubs in the global trade network. Findings & value added: Our main policy-related finding is that there are two main convergence clubs — one covering roughly 80% of all units and the other one close to 20% (the number of divergent sectors is practically negligible). The dominant club is characterised by high and growing concentration, which poses a risk to the trade network, as, over time, it makes trading partners more susceptible to supply-side shocks. Since the global economy has proven to be surprisingly homogenous in terms of concentration patterns, it seems justified that growing concentration could be considered a systemic feature for future theoretical international trade models. Our main methodological finding is that the WIOD database, which is still used as a standard for such analyses, may be misleading due to its limitations. While the results based on the ICIO and WIOD databases do not align, ICIO seems to be superior in terms of coverage.

Labour market tightness in the post-COVID-19 era

Since 2020, the labour market in advanced economies has shown resilience against successive supply-side shocks. High job vacancy rates and historically low unemployment, despite a recent weakening of economic growth, imply a lower sensitivity of the labour market to changes in the business cycle, underscoring the need to re-evaluate labour market tightness, as it could increase the risks of wage-price spirals and more restrictive monetary policy. Ιn the present paper, we analyse the degree of labour market tightness and its implications for wages, inflation and monetary policy in two large open economies, the US and the euro area, and in a small open economy, Greece, that has undergone substantial labour market reforms, to explore whether post-pandemic labour market developments have common or idiosyncratic features. We find that policy support measures to address the pandemic and the energy crisis have decoupled unemployment from cyclical fluctuations, with the gap narrowing in 2023. Labour market tightness in the post-pandemic era has mainly been driven by a robust increase in labour demand, while labour supply has reverted to or exceeded pre-pandemic levels in the US, the euro area and Greece. Real compensation per employee lags labour productivity levels in all three economies, whereas it remains below its pre-pandemic level in the euro area and Greece. This suggests that the economies in question could tolerate some further catch-up in real wages in the short term without experiencing inflation.

Measuring dynamic spillovers between crude oil and grain commodity markets: A comparative analysis of demand and supply shocks

This study explores spillover effects between oil and grain markets in response to supply- and demand-side shocks using the TVP-VAR-DY approach. Spillover effects among markets are enhanced under both demand and supply shocks. Wheat consistently acts as the transmitter of shocks for both types of events. Furthermore, corn is transmitter of spillovers to other markets. In contrast, soybeans receive spillovers during supply-side shocks and transmit them during demand-side shocks. Oil initially transmits shocks to other markets during demand-side events, but transitions to a receiver role as demand diminishes and supply-side crises emerge. Measures should be taken to reduce market risks when major events occur.

Risk spillovers in Chinese production network: A supply-side shock perspective

Highly interconnected production network exists in one economy, and it is crucial to investigate how and why supply-side shocks spread across industries via the production network and cause systemic risks in the real sector. Based on input-output framework, this paper designed a model to simulate the propagation of risk spillovers along the production network given supply-side shocks. This paper defined the systemically important industries (SIIs) and systemically vulnerable industries (SVIs) according to the degree and direction of risk spillovers. Simulation results show that risk spillovers spread among industries via the production network, leading to systemic risk in the real sector. This paper also classified the important risk spillover paths “SVIs → SIIs → SVIs” in the model for risk regulation and prevention and identified 75 risk spillover paths and 9 closed-loop paths in 2018. Furthermore, key factors of systemic importance (vulnerability) included input-output relationships and production network centrality. This paper provides a scientific basis to strengthen the risk supervision of the real sector based on the supply chain.

Impact of Supply Side Shocks on Kenyan Exports to COMESA

The study sought to determine the impact of supply-side shocks on Kenyan exports to COMESA region. This was motivated by the increasing number of shocks that have hit the country, the region and the global economy in the recent past. Using secondary data covering the period from 1990 to 2021, the study applied the Vector Auto Regression model and estimated impulse response functions to show the effect of shocks on each of Kenya's exports to the region. The study established that Kenya's exports to COMESA as a region are impacted by oil price shocks, variations in investment level in Kenya and exchange rate. Erratic weather patterns characterized by droughts do not affect the country's exports to the region. Therefore, the paper recommends that for Kenya to boost its exports to the region and subsequently boost Intra-COMESA trade, the government of Kenya should promote investment and ensure that the country gets enough crude oil supplies even when global prices are rising as this will boost the country's exports to the region.

The impact of the COVID-19 pandemic on regional inflation in Indonesia

PurposeThis paper aims to examine the impact of COVID-19 on inflation in Indonesia. There are two questions in this study: (1) Is there an impact of COVID-19 on inflation in Indonesia? and (2) whether there are differences in the impact of COVID-19 on regional inflation in Indonesia, considering the different intensities associated with COVID-19.Design/methodology/approachThe estimation technique showing the impact of the COVID-19 pandemic on inflation uses the difference-in-differences (DID) method described by Pischke (2008). The core idea of the estimation above is continuous DID using panel data. No province was affected by COVID-19 before 2020:Q1. Once COVID-19 hits the economy, the effects vary from one district to the other.FindingsThe authors find that the severity of the COVID-19 pandemic negatively affects inflation – the more severe the pandemic, the lower the inflation. This finding conforms with several studies suggesting higher demand pressures than supply during the pandemic. Compared with supply-side indicators such as production index, demand-side indicators – such as consumer confidence index and real sales index – fell more sharply.Research limitations/implicationsIn the Introduction section, the authors have added a discussion that indeed the COVID-19 pandemic affects inflation through both the demand- and supply-side shocks. While factors driving regional differences in inflation rate are important research and policy questions, the analysis of these factors is outside the scope of this study. The study focuses on the COVID-19 impact on inflation and whether the pandemic disproportionately affects some regions than the others.Practical implicationsThis research is important to provide an understanding of the nature of the pandemic on inflation in the context of the Indonesian economy, which is essential to policy formulation, especially for the Central Bank in carrying out the mandate to maintain rupiah stability. This issue is due to the implications of different policy responses between demand- and supply-side shocks.Originality/valueAs a novelty in this study and research gap, the authors use a continuous DID method to account for the varying intensity of COVID-19 across the provinces. In particular, the authors use the number of positive cases of COVID-19 per 1,000 population as opposed to just a binary indicator of before-and-during COVID-19 across provinces.

External Shocks and Business Cycles in Nigeria: Accounting for the Roles of Domestic Oil-Refining Alternative and Oil Price Fiscal Rule

The paper investigates the role of oil price fiscal rule (OPFR), and functional domestic oil refineries in curtailing the effects of external shocks on the Nigerian economy. A dynamic stochastic general equilibrium (DSGE) model is developed, calibrated and estimated using Random Walk Metropolis sampling method. The model is estimated under the benchmark, OPFR-only, and refinery-only scenarios. The results reveal that building or revamping domestic oil refineries may help the economy to withstand long term shock, but in the short run, the OPFR clearly emerges as the most potent. The non-oil external shocks are not significant under the three scenarios. However, oil-related external shocks have significant implications for business cycles in Nigeria, reinforcing the demand- and supply-side shocks. Furthermore, it is found that there is a need for functional domestic oil refineries in insulating the economy against external shocks, however, there is a huge welfare loss associated with refinery development alone. Thus, policymakers should consider instituting the OPFR to stem external shocks in the short run, while building oil refineries to tackle external shocks in the long run.

Is the Influence of International Oil Price Changes on Economic Growth Significant in India?

The changes in the price of oil by creating supply-side shocks, inflation risks, and exchange rate risks, generate havoc in the development process of oil-importing countries like India. In this perspective, this study examined the degree and direction of connection among the price of oil and economic growth in India while controlling for the influences of exchange rate, real interest rate, rate of inflation, net inflows of foreign direct investment, and trade openness. The work uses the auto-regressive distributed lag bounds test approach and provides evidence in support of the negative effect of oil price changes on the long-run growth of the Indian economy when net inflows of foreign direct investment and foreign exchange rate exert statistically significant negative effects on this relationship. However, trade openness has a statistically significant positive effect. It is further observed that this long-run relationship has a convergence tendency towards the equilibrium value through short-run adjustments, thereby making the estimated relationship stable. The implication is that international oil price fluctuations can be used to predict the country's long-run economic growth. Besides, a policy effort is required to promote alternative energy consumption at home to keep oil demand under control. Furthermore, trade policies are required to be revisited to boost exports by the country to accommodate the negative effects of increases in the price of oil at the international level on economic growth.

Optimal monetary policy responses to carbon and green bubbles:A two-sector DSGE analysis

This paper investigates the emergence of carbon and green bubbles and their impacts on macroeconomic performance and the environment, with a particular focus on identifying the optimal monetary policy responses. We construct a two-sector dynamic stochastic general equilibrium (DSGE) model that incorporates monetary policy and allows carbon and green rational bubbles to emerge. We find that while supply-side shocks drive bubble formation in both sectors, demand-side shocks have a disproportionate impact on these sectors. The paper also shows that contractionary monetary policies are effective in reducing both carbon emissions and asset bubbles. Optimal monetary policy response to the emergence of asset bubbles is calculated, emphasizing the crucial role of central banks in designing monetary policy rules that account for the emergence of bubbles. Social welfare can be optimized by reducing annual interest rates by 0.0612% and 0.0512% when green and brown bubble sizes increase by 1%, respectively. Furthermore, the most effective strategy to achieve a significant improvement in social welfare in both the short-run and the long-run is to implement policies where nominal interest rates react negatively to both types of asset bubbles simultaneously. The impacts of carbon taxation and green credit policies on asset bubbles are also studied.

The international impact of a fragile EMU

This paper aims at quantifying the international impact of euro area stress shocks, which arise also from the incomplete nature of the European Economic and Monetary Union (EMU). We first disentangle such shocks from more general global risk aversion shocks by using sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (SVAR) model with financial variables. We then assess the impact of euro area stress shocks on macroeconomic variables in the euro area and the rest of the world via panel local projections. We find that these shocks have similar effects to supply-side shocks for other advanced economies, and demand-side shocks for emerging economies. They also result in trade diversion across advanced and emerging economies and they are found to be noticeably more heteroscedastic than global shocks. As in previous literature, global risk shocks have an impact that can be interpreted as a demand-side shock, with a significant fall in economic activity and trade after risk-increasing shocks.

Consequences of COVID-19 Shocks and Government Initiatives on Business Performance of Micro, Small and Medium Enterprises in Saudi Arabia

The purpose of this paper is to determine how COVID-19 shocks and government policies affected MSMEs’ financial and non-financial performance during the economic turmoil. The paper used both quantitative and qualitative methods. An online questionnaire survey was used to collect quantitative data from 380 Saudi MSMEs. The direct effects of the exogenous variables on the endogenous variable were determined using partial least squares structural equation modeling (PLS-SEM). Furthermore, multigroup analysis was used to examine the moderating effect of policy response on other variables. Interviews were conducted from a qualitative standpoint, and the information was converted into texts and qualitatively analyzed. Demand Shocks, Management/Operational Shocks, and Supply Shocks all have a significant impact on financial performance. The only significant predictor of non-financial performance was demand side shocks. Management/operational side shocks, on the other hand, have no effect on the non-financial performance of MSMEs. Furthermore, policy response was found to be a powerful predictor of both financial and non-financial performance. During the COVID-19 outbreak, MSMEs’ policies and assistance programs had no discernible impact on demand and supply side shocks, as well as financial and non-financial performance. Overall, the findings of this study will help the Saudi government and other policymakers determine the best way to deal with current and future COVID-19 pandemics.

Financial stress in Russia: Exploring the impact of oil market shocks

Oil market shocks significantly influence the financial and macroeconomic performance of resource-rich economies, serving as a critical anchor for their economic stability and growth. Russia is a significant exporter of oil and is geopolitically exposed; we examine the response of financial stress levels to decomposed oil market shocks, namely supply-side shocks, demand-side shocks, and financial risk exposures, during the period from July 13, 2012 to June 30, 2022, considering periods of historically abrupt oil price movements. We employ several econometric approaches to estimate our model, including the Cross-Quantilogram approach (CQ), Cross-spectral quantile coherency technique, and Time-varying parameter VAR model with stochastic volatility. Our findings reveal a robust intensification of financial stress in the Russian financial market when oil prices rise due to supply and demand shocks in the short term. Conversely, negative oil price shocks tend to diminish financial stress in the long run. Furthermore, our dynamic analysis indicates that the Russia-Ukraine conflict led to an increase in financial stress caused by oil market shocks, although the effect was comparatively weaker than during the US shale boom. Based on our research, we present several policy implications to address the identified challenges and promote financial stability in the face of oil market volatility.

Macroeconomic impacts of COVID-19 pandemic first wave in the world

The paper seeks to identify the essential global-economic macro-shocks resulting from efforts by consumers, firms, or government policies to reduce social distancing, which caused a sharp temporary change in the world economy during the pandemic outbreak in the second quarter of 2020. The purpose is fulfilled using a simple two-period real-business cycle model. The observed reaction of the global economy in the second period of 2020 is measured by the deviation of the time series of GDP and its components, labor, labor income, and average labor product in the USA and EU from the log-quadratic trend. The model can replicate the observed economic response by reducing the total factor productivity, labor demand, and labor supply—no need to assume sticky prices. As a sudden drop in performance is supposed, followed by a modest recovery already in the following period, it is not assumed that the government would be able to avert it in time with fiscal or monetary policy. Moreover, the assumption of variable prices and supply-side shocks does not support such a policy.

Multivariate Time Series Model in Forecasting Gross Domestic Product Growth, Inflation, and Foreign Direct Investment in Tanzania

The purpose of this study is to use time-series econometric methods, specifically Vector Autoregression (VAR) models, to predict the growth of Tanzania's Gross Domestic Product (GDP), Inflation, and Foreign Direct Investment (FDI) using annual data from 1991 to 2020. The research finds that there is a Granger causality between GDP and FDI, largely due to increased private investment and consumption. However, there is no Granger causality between inflation and GDP or FDI. The study predicts that inflation will remain stable but may experience occasional spikes due to supply-side shocks. Additionally, the study anticipates that FDI will continue to increase due to ongoing reforms aimed at improving the business climate and attracting more overseas investments. The model diagnostic test shows no autocorrelation and a stable model. Finally, the study forecasts that both GDP and FDI will continue to rise due to major sectoral projects taking place in Tanzania. This information is useful for policymakers and investors who can use it to make informed decisions and manage the risks associated with economic growth and development in Tanzania.

A regional input-output model of the COVID-19 crisis in Italy: decomposing demand and supply factors

We propose an empirically estimated inter-regional input-output model of the Italian economy designed for COVID-19 impact assessment, intended as a tool for public authorities facing comparable adverse events and requiring timely estimates of sectoral and regional economic impacts. We evaluate the contributions of demand- and supply-side factors to output losses in Italy during the pandemic, providing insights on the suitability of demand- and supply-side policies. Supply-side shocks, as a consequence of mandated closures, are the primary driver of output losses only during the nationwide lockdown of spring 2020. During the following stages, changes in final demand due to income losses and changes in mobility play a pivotal role at the aggregate, regional, and sectoral levels. While this result supports demand-side policies, the efficacy of such policies may be hampered when final consumption demand is low chiefly due to reduced mobility rather than income losses.

Pre- and post-pandemic seafood purchasing behavior in the U.S.

The global COVID-19 pandemic resulted in an unprecedented economic shock in current times. Previous literature on consumer shopping behaviors during economic downturns is limited, and studies specific to seafood focused primarily on supply-side shocks. A national survey was conducted using an online platform from February 22 to April 6, 2021 that targeted 100 seafood consumers in each of 20 market areas across the U.S. Following data cleaning, 1908 usable responses were obtained. Results documented significant changes in consumer shopping behaviors. Significantly greater percentages of meals (generally and of seafood) were consumed at home and fewer away from home, as expected. Demographic differences were found in shopping behaviors by age, education, income, and gender, but not by ethnic group. Frequency of shopping decreased in 2020, but the expenditure per shopping trip did not, resulting in less overall spending for groceries as compared to 2019. Respondents were less likely to purchase seafood for takeout or for home delivery of prepared meals as compared to general meals because of concerns over quality, freshness, and safety of seafood. Half of respondents consumed approximately the same amount of seafood as before the pandemic; with 31% reporting decreased seafood consumption, and only 19% increased seafood consumption. Thus, study results provide evidence of a pandemic-imposed shift to consuming greater proportions of seafood meals at-home than away-from-home, and not an overall increase in seafood consumption. The choice of species eaten most often did not differ pre- and post-pandemic. Those respondents who reported decreased seafood consumption in 2020 did so primarily because of: 1) its expense, given reduced incomes from working fewer hours or being laid off; 2) unwillingness to prepare fish at home for the smell and “mess”, or being uncomfortable preparing it; or 3) simply not preferring or liking seafood well enough to eat it more frequently. Those who reported increasing seafood consumption did so primarily because it was considered to be a healthy food choice. Additional work is needed to further examine consumption and shopping behaviors throughout the recovery in 2021 and 2022.

The causes of and responses to today’s inflation

AbstractOver the last couple years, the world has experienced the highest levels of inflation in more than four decades. This paper provides a framework for analyzing the causes and the appropriate responses. We show that it is not caused by an excess of aggregate demand, and in particular, not caused by any excess consumption arising from excessive pandemic spending, but by supply-side shocks, largely induced by the pandemic (e.g., chips), and also by the war in Ukraine, combined with sectoral demand shifts. We analyze the role played by market power and the lack of resilience. Increases in interest rates, beyond normalizing levels, will do little to address the underlying problems and may exacerbate them, impeding effective responses to supply shortages. The paper describes alternative fiscal and other measures that, while addressing current inflation, have further long-term welfare benefits.

Time-Varying Relation between Oil Shocks and European Stock Market Returns

This paper considers a time-varying parameter vector autoregression model to analyze the varying impact of three types of structural oil shocks (the supply-side shock, the aggregate demand shock, and the oil-specific demand shock) on the European stock market since the 1990s. Our findings show that the three types of oil shocks heterogeneously influence stock market returns in the euro area, and that this influence considerably changes over time during the period considered. First, an unexpected increase in oil supply appears to exert a positive but generally declining effect in the period before the Global Financial Crisis (GFC) of 2007–2009, which descends into negative values after the GFC. Second, an unanticipated increase in aggregate demand triggers a generally positive effect on stock market returns in the euro area. However, in the period from 2003 to 2005, stock market returns responded negatively, which could be attributed to the so-called growth-retarding effect. Third, an unexpected increase in oil-specific demand instigates a negative response in the pre-GFC period (considering the response 4–5 months after the shock), although this changes to a positive effect thereafter. Interestingly, irrespective of the origin of oil price fluctuations, oil price increases are associated with positive European stock market returns after the GFC. This signals a greater degree of oil market financialization.

Is there a Neo-Fisher Effect in the case of Selected Central and Eastern European Countries?

At the current juncture, the global economy is facing adverse supply side shocks amid the ongoing war in Ukraine. The persistent energy crisis and a potential flare-up in bottlenecks in global value chains are expected to further fuel inflationary pressures. Against the background of escalating prices, central banks have already started increasing the key interest rates.

Storm survivors: Evidence from firms in times of pandemic

The COVID-19 outbreak has had severe economic consequences across the globe. The crisis emanating from the pandemic has caused demand and supply side shocks, more far reaching than any crisis in living memory. We use a new data set from the 2020/21 Egyptian Industrial Firm Behavior Survey to examine determinants of firms’ resilience during the pandemic. Crisis present the opportunity for what Schumpeter (In Economics of the Recovery Program, McGraw-Hill, 1934) calls creative destruction. Have manufacturing firms been all hit by the crisis equally, or were less efficient firms more likely to exit or downsize their activities thereby ‘cleansing’ the market? Two sets of factors affect firm dynamics and survival: (1) firms’ innate characteristics and; (2) firm behavior, which captures the extent to which good management, innovation, the adoption of advanced technologies and worker training, have provided an opportunity for firms to adapt their business models and show greater resilience in coping with the crisis. We illustrate the vulnerability of private, smaller, informal firms and those that are not located in industrial zones. Second, pre-COVID behavioral characteristics matter for firm dynamics. The food sector and sectors identified as ‘COVID sectors’ show more resilience. Some behavioral traits vary by sector and are more influential depending on firm size.