Productivity Shocks Research Articles

Equilibrium Yield Curves with Imperfect Information

I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. Imperfect information can justify a shock to signals about productivity that does not lead to actual changes in productivity, which can be interpreted as a demand shock. When incorporated in a DSGE term structure model with a standard productivity shock, this demand shock generates term premia that are on average higher, with sizable countercyclical variation that arises endogenously. The model helps reconcile the empirical evidence that term premia have been on average positive and countercyclical, with numerous studies pointing to demand shocks as a key driver of business cycles over the last few decades.

Energy-related uncertainty shocks and inflation dynamics in the U.S: A multivariate quantile-on-quantile regression approach

Existing literature suggests that uncertainty shocks can propagate like aggregate demand shocks or aggregate supply shocks. By way of extension, this study investigates the effect of energy-related uncertainty shocks on U.S. inflation while incorporating the effect of industrial production and interest rate uncertainty shocks. Using a multivariate quantile-on-quantile regression for the period 2000:M6 to 2019:M7, the findings reveal that energy-related uncertainty shocks amplify inflation by manifesting as cost-push shocks with a stronger connection emerging in quantiles slightly above the median quantile distribution of energy-related uncertainty. Although industrial production positively drives inflation, its effect is observed less around median quantiles of inflation than in the lower and upper quantiles. Furthermore, the effect of interest rate uncertainty is negative and stronger in quantiles around the median of inflation, suggesting that interest rate uncertainty behaves like aggregate demand shocks. Based on these findings, policy implications are offered.

Effect of the intermittency of non-conventional renewable energy sources on the volatility of the Colombian spot price

This paper explores one of the side effects and challenges that integrating non-conventional renewable energy sources poses to the Colombian electricity market, the spot price volatility which is directly related to financial risk. We propose a vector error correction model that allows an integrated and dynamic modelling of the offer-side of the spot market by considering bid prices, available energy, renewable energy production and the spot price. To validate the model, we performed statistical tests on the residuals of the model and back-testing. The results show that given a one standard deviation shock in renewable energy production from non-conventional sources, the spot price volatility increases from 12.7 % to 14.5 % in a 365-day horizon, which represents a relative increase of 14.2 %. Also, when evaluating different renewable energy integration scenarios and the official system expansion, we see that assuming 100 % fulfilment of the non-conventional sources integration plan, the volatility goes up to 31.2 % vs. 12.3 %. It is also worth noting that if the plan is fulfilled up to 25 % there is no significant increase in spot price volatility, which can be justified by the simultaneous expansion of conventional sources that compensate for the effects of non-conventional renewable sources.

Behavior of Economic Agents With Bounded Rationality in a Semi-open New Keynesian Model

The purpose of the article is to analyze the behavior of economic agents with limited rationality in a New Keynesian model which postulates that imported equipment and technology are one of the factors of production and that households consume only domestic products. Economic agents’ expectations are based on stationary values for the output gap and inflation and also on extrapolation of the latest available data on these variables. The weighted shares of agents applying these rules change endogenously. Histograms of the frequency distribution of the degree of optimism and the impulse responses of monetary policy shocks and technology shocks to the variables under study indicate that a less open economy tends to undergo an economic cycle with a smaller amplitude than a more rigid economy. An analysis of the trade-offs between inflation volatility and the output gap established their non-linear nature (in contrast to standard models with rational expectations). The results from analysis of trade-offs was that stabilization of inflation in models with limited rational expectations requires an increased interest rate reaction compared to a similar reaction for a model in which agents have rational expectations. The results obtained may be useful in designing monetary policy to stabilize inflation and output gaps.

Macroeconomic effect of NBFC default shock in India: a four-sector DSGE model

ABSTRACT In this study a four-sector dynamic stochastic general equilibrium model is developed by introducing banks and non-banking financial companies (NBFCs) in a general two-sector real business cycle model in context of Indian economy. Examining the impact of three shocks namely NBFC default shock, productivity shock and investment shock, default of NBFC on its loan does not have any significant impact on aggregate output, consumption and investment. The shock has localized impact on the NBFC sector itself because of its low asset size and weak interconnectedness with the Indian economy. Productivity and investment shock have significant impact on the macroeconomic variables.

Productivity Shocks of Dominant Companies and Local Housing Markets

We extend the literature on the influence of firm-level characteristics on housing markets by exploring the association between the labor productivity shocks of dominant firms and local housing prices. Using a sample of all U.S. firms from COMPUSTAT during 1980-2017, we find that the aggregate shocks of labor productivity of dominant firms at the metropolitan statistical area (MSA)-level explain for a significant portion of the local housing price changes in MSAs while controlling for other housing price determinants. About a year or more is required for the shocks to propagate through the local housing markets, which make them a viable predictor of future housing price. The productivity shock – housing price relation is stronger in areas that have more concentrated high-tech dominant firms or where dominant firms have closer links to their local non-dominant industry peers. Shocks are also more influential during economic expansion than economic contraction. Furthermore, the relation also exists at the zipcode level but the shocks propagate faster than at the MSA-level. The findings provide helpful insights for real estate practitioners and policymakers, especially in areas with a higher concentration of large companies.

Modelling the Volatility Inducement of Climate Change in Food Prices: The Role of Technological Shocks

We used a GARCH-MIDAS framework to demonstrate that, in addition to the food system, temperature anomalies can cause food price volatility. We show that technology shock can act as an effect modifier between food prices and climate change. We infer that initiatives targeted at mitigating climate change from causing excessive volatility in food prices should involve technology in addition to modification of food demand and supply processes.

Macroeconomic Policy Adjustments on Environmental Protection Effectiveness Research - Based on the DSGE Model

Through the dynamic stochastic general equilibrium model (DSGE model), this article explores the balance between economic development and environmental protection, focusing on the in-depth mutual influence among economic agents such as households, banks, producers, and government in promoting economic growth and achieving environmental protection. The model comprehensively considers factors such as production technology, carbon tax policies, bank loan rates, and government fiscal policies, aiming to analyze the specific impacts of these factors on economic growth, environmental protection, and social welfare. By detailed settings and analysis of consumption, savings, and labor supply decisions of households, the financial intermediary role of the banking sector, and carbon emissions and environmental technology use in the production sector, this study provides theoretical support for an environmentally friendly economic growth path. Through policy analysis, this article reveals the short-term and long-term effects of positive technological shocks, taxation on energy firms' loan rates, carbon tax policies, and government spending on the economy and the environment, providing a theoretical basis and reference for formulating relevant economic and environmental policies. The results indicate that appropriate macroeconomic policies can effectively promote economic growth while reducing carbon emissions and enhancing social welfare.

Carbon emissions cap or energy technology subsidies? Exploring the carbon reduction policy based on a multi-technology sectoral DSGE model

As global climate change becomes increasingly severe, energy technology innovation has become a key means of coping with the climate crisis and realizing green and low-carbon development. However, existing literature rarely examines the effects of carbon emission reduction policies based on the perspective of energy technology progress for both short-term economic fluctuations and long-term equilibrium. This paper introduces the fossil energy technology sector and the renewable energy technology sector into the dynamic stochastic general equilibrium (DSGE) model, and compares the effectiveness of the carbon emission cap policy, the fossil energy technology subsidy policy, and the renewable energy technology subsidy policy under the framework of China’s carbon trading market in promoting macroeconomic growth and controlling pollutant emissions. We found that in long-term, the emission reduction effect of the carbon emission cap policy falls short of the other two policies, and subsidizing fossil fuel technologies is more cost-efficient comparatively. The government expenditure shock can all stimulate macroeconomic growth with crowding out of private investment and household consumption, whereas the energy technology research productivity shock leads to a decline in total output and an increase in renewable energy technology demand. In addition, pollutant emissions are pro-cyclical under the impact of total carbon policies and counter-cyclical under the impact of energy technology subsidy policies. This article constructs a multi-technology sectoral dynamic stochastic general equilibrium model, expanding the research perspective and theoretical framework for evaluating carbon emission reduction policies. At the same time, it proves the importance of the government to implement the phased energy technology subsidy policy while implementing the carbon emission cap policy, which provides important enlightenment for the implementation and adjustment of carbon emission reduction policy.

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

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

General Equilibrium Model for Monetary Policy Responses to Macroeconomic Instabilities in Developing Economy: A Ghanaian Perspective

The study develops a standard New Keynesian model to examine how monetary authority reacts to both domestic and external shocks as well as how its policy decision impacts the general macroeconomy in developing African economy. Using Bayesian estimation techniques and a Ghanaian dataset, the article also seeks to determine the best-suited monetary policy rule for Ghana and countries with similar characteristics. The basic finding is that a forward-looking Taylor rule—where authority reacts to one-period-ahead inflation deviation from target alongside the current output gap—is the most appropriate monetary policy rule for Ghana. Another salient finding is that variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. In addition, the dominant determinants of inflation are exchange rate risk premium and price markup shocks. Collectively, the article also unveils that monetary policy responses to macroeconomic shocks are broadly in line with conventional economic theory. There is also conspicuous evidence that the general equilibrium model with representative consumers is practically suitable for monetary policy analysis in Ghana, as contractionary monetary policy impulse is able to contemporaneously induce disinflation and output contraction. Given the strong evidence of a large segment of the unbanked population in Ghana, the findings in this study could be verified based on a model that allows for the co-existence of optimizing and non-optimizing consumers. JEL Classification: B41, C5, C11, D11, D21, D41, D42, E2, E12, E43, E52, E58, F31, F41

Decomposing Structural Change

Abstract We identify the mechanisms governing the propagation of technological shocks to the sectoral allocation of labor in a non-parameterized growth model. These propagation mechanisms are: (i) the change in aggregate income; whose effect on sectoral composition depends on the income elasticities of consumption demand; (ii) the change in the relative prices of consumption goods, which alters the sectoral composition depending on the Allen-Uzawa elasticities of substitution between goods; (iii) the change in the rental rates, whose effect on sectoral composition is determined by the sectoral elasticities of substitution between capital and labor; and, (iv) the direct effect of the sector and factor bias of the technological change. From this analysis, we derive an accounting method to measure the contribution of these propagation mechanisms to structural change in parameterized growth models. By using some well-known parameterizations, we account for the contribution of each mechanism to the U.S. structural change in the period 1948–2010.

Sectoral shocks, production linkages, and business cycles in China

This paper develops a dynamic multisector model to examine the contribution of sectoral productivity shocks and input-output linkages to the dynamics of the Chinese economy. Our baseline simulations replicate the volatility and comovement in the data fairly well. More importantly, we show that the idiosyncratic components of sectoral productivity shocks together with the production linkages are the primary drivers of volatility and comovement, while the common components of sectoral productivity shocks mainly result in resource reallocation across sectors through substitution effects. The sensitivity analysis highlights the importance of elasticity-of-substitution parameters. Finally, the share of state-owned enterprises in each sector is shown to have significant impact on the aggregate volatility.

Plant-level adjustments to imports and exports at the extensive margin

This paper presents an empirical analysis of plant level responses to the China trade shock based upon a DSGE framework with heterogeneous firms. The empirical analysis shows that soaring imports from China are associated with a higher probability of plant closure. By contrast, firms in export oriented industries are less likely to exit. We rationalize these findings by several counter-factual experiments based upon a DSGE framework. Imports always raise the exit rate but the export-effect is ambiguous. More exports fuel competition among domestic rivals associated with more exits. However, this competition effect disappears when the share of exporters is extremely high. The effects of imports and exports on firm entry are close to zero in both theory and empircs. We also introduce a novel productivity shock channel. Additional export sales better protect firms from other shocks. We show this by introducing negative productivity shocks into the model.

Equilibrium yield curves with imperfect information

I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. Imperfect information can justify a shock to signals about productivity that does not lead to actual changes in productivity, which can be interpreted as a demand shock. When incorporated in a DSGE term structure model with a standard productivity shock, this demand shock generates term premia that are on average higher, with sizable countercyclical variation that arises endogenously. The model helps reconcile the empirical evidence that term premia have been on average positive and countercyclical, with numerous studies pointing to demand shocks as a key driver of business cycles over the last few decades.

Inflation, Price Dispersion, and Welfare: The Role of Consumer Search

In standard macroeconomic models, the costs of inflation are tightly linked to the price dispersion of identical goods. Therefore, understanding how price dispersion empirically relates to inflation is crucial for welfare analysis. In this paper, I study the relationship between steady-state inflation and price dispersion for a cross section of U.S. retail products using scanner data. By comparing prices of items with the same barcode, my measure of relative price dispersion controls for product heterogeneity, overcoming an important challenge in the literature. I document a new fact: price dispersion of identical goods increases steeply around zero inflation and becomes flatter as inflation increases, displaying an Upsilon-shaped pattern. Current sticky-price models are inconsistent with this finding. I develop a menu-cost model with idiosyncratic productivity shocks and sequential consumer search that reproduces the new fact and exhibits realistic price-setting behavior. In the model, inflation-induced price dispersion increases shoppers' incentives to search for low prices and thus competition among retailers. The positive welfare-maximizing inflation rate optimally trades off the efficiency gains from lower markups and the resources spent on search.

Cycles and their important shocks: completing the investigation

Abstract The paper looks at the question of measuring the importance of shocks to cycles. We consider two types of cycles - oscillations and those summarized by the NBER that require a study of growth in activity to establish turning points in the level of activity. The latter demarcate expansions and contractions. We establish a connection between these two concepts of cycles that shows shocks may have very different effects on each. As an application we look at a question that has often been asked over how important technology shocks are to cycles in activity? Some recent research concludes that total factor productivity (TFP) shocks are not important for oscillations and therefore models should be designed to reflect that. Using the same data we show that TFP shocks are very important to both types of cycles.

Climate change-stock return volatility nexus in advanced economies: the role of technology shocks

PurposeGiven the systemic nature of climate change, there are many interdependencies between its primary components and feedback loops, emphasising the need to simultaneously consider the stock market implications of physical and transitional climate-related risks. More importantly, carbon emissions are expected to be reduced through various transition pathways. However, transitional climate risks have been validated as capable of predicting stock market behaviour, hence the motivation for the role of technology shocks.Design/methodology/approachWe use a GARCH-MIDAS model to examine the relationship between climate change and stock return volatility since it enables data analysis at various frequencies within the same framework. We employ a novel dataset to track technology shocks, and the study spans decades of data from 1880 to 2018.FindingsWe find that the relationship between climate change and stock return volatility is episodic and varies with different degrees of intensity of high-temperature anomalies and technology shocks. Our results suggest that policy actions should include investing in climate technologies to reduce greenhouse gas emissions and encouraging investment in eco-friendly assets.Originality/valueThere has been little or no consideration for the probable complementary effects of physical and transition climate-related risks on stock markets. Hence, the novelty in the context of this study is the hypothesis that transitional risks, if explored from the point of view of technological innovations, can moderate the stock market’s vulnerability to physical climate risks.

Estimation of industry-level basic digital capital services in China: A variable depreciation rate estimation method based on DSGE

Accurately measuring the input of digital capital is of great significance for understanding the development pattern of China's digital economy, nurturing new quality productivity, and achieving high-quality development. However, existing representative studies often assume a constant depreciation rate for capital goods, which does not align with reality. In this paper, we address this limitation by introducing dynamic stochastic general equilibrium (DSGE) model that estimates the variable depreciation rate for each capital good. By setting the depreciation rate as a function of capital maintenance expenditures and utilization rates, we provide a more realistic approach. The empirical results obtained through Monte Carlo simulation demonstrate that the trend of depreciation rates for all types of capital goods aligns with China's economic development. Additionally, we find that investment-specific technology shock plays a significant role in affecting changes in the depreciation rates of capital goods. This shock leads to an increase in capital utilization rates and a decrease in capital maintenance expenditures, resulting in higher depreciation rates. Notably, the depreciation rate of basic digital capital is more sensitive to exogenous shock compared to non-digital capital. Furthermore, the paper estimates the basic digital capital service of 19 industries in China from 1981 to 2020. The results indicate a steady increase in the services provided by basic digital capital, with particularly rapid growth observed in industries such as information transmission, software and information technology services, and the financial sector. When comparing our estimation results with those of representative literature, we find that the national-level productive capital stock and the basic digital capital services estimated using our methodology closely align with existing literature. This validation confirms the effectiveness of our methodology and the reliability of the estimated industry-level basic digital capital services.

Asset prices in a production network

The relative importance of sectoral and aggregate productivity shocks in asset pricing is examined using a nonlinear dynamic equilibrium model where heterogeneous sectors interact in a production network. The model accounts for the heterogeneity in sectoral stock returns and endogenously generates conditional heteroskedasticity and fat tails. The equity risk premium is shown to be driven by sectoral shocks – specially to investment good producers and mining – with a limited contribution from the aggregate shock. SMM estimates of the elasticities of substitution between material inputs and between investment goods support the assumption of gross complementarity employed by previous network literature.