Transitory Shocks Research Articles

Time variation in the relative importance of permanent and transitory components in the U.S. housing market

This paper uses an unobserved component model with heteroskedastic disturbances based on Harvey et al. (1992) to measure the time-varying importance of permanent and transitory components in the U.S. house prices. Our findings show that the cyclical component in the U.S. housing market is highly persistent and house prices were more than 20% above the trend at the peak of the housing boom in 2006. Our results also suggest that there was a big increase in the relative importance of the transitory shock variance at the peak of the housing crisis.

Nominal Wage Rigidity in Village Labor Markets

This paper develops a new approach to test for downward wage rigidity by examining transitory shocks to labor demand (i.e., rainfall) across 600 Indian districts. Nominal wages rise during positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, wages do not adjust back down. Ratcheting reduces employment by 9 percent, indicating that rigidities distort employment levels. Inflation, which is unaffected by local rainfall, enables downward real wage adjustments—offering causal evidence for its labor market effects. Surveys suggest that individuals believe nominal wage cuts are unfair and lead to effort reductions. (JEL E24, E31, J23, J31, O15, O18, R23)

The Impact of Income and Non-Income Shocks on Child Labor: Evidence from a Panel Survey of Tanzania

Summary This paper investigates the impact of income and non-income shocks on child labor using a model in which the household maximizes utility from consumption as well as human capital development of the child. We also investigate if access to credit and household assets act as buffers against transitory shocks. Our results indicate significant effects of agricultural shocks on the child’s overall work hours and agricultural work hours, with higher effects for boys. Crop shocks also have significant adverse effects on school attendance, with girls experiencing a more-than 70% increase in the probability of quitting schooling. The results also indicate that access to a bank account has a buffering effect on the impact of shocks on child hunger. Having a bank account reduces both male child labor and household work hours of a girl child. While assets reduce working hours of girls, we do not find it having a significant effect on boys. We also do not see assets to act as a buffer against shocks.

Correlated income shocks and excess smoothness of consumption

In the literature, econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component, with uncorrelated permanent and transitory shocks. Using data on realized individual incomes and individual expectations of future incomes from the Survey of Italian Households׳ Income and Wealth, I find that permanent and transitory shocks are negatively correlated. Relaxing the assumption of no correlation between the shocks, I explore the effects of correlated income shocks on the estimated consumption insurance against permanent and transitory shocks, and consumption smoothness using a life-cycle model with self-insurance calibrated to U.S. data. Negatively correlated income shocks result in smoother consumption, and upward-biased estimates of the insurance against transitory (and permanent when borrowing constraints are not tight) income shocks. While the life-cycle model with negatively correlated shocks fits well the sensitivity of consumption to current income shocks observed in U.S. data, it falls short of explaining the sensitivity of consumption to income shocks cumulated over a longer horizon.

SALES, INVENTORIES AND REAL INTEREST RATES: A CENTURY OF STYLIZED FACTS

SUMMARYWe use Bayesian time‐varying parameter structural vector autoregressions with stochastic volatility to investigate changes in reduced‐form and structural correlations between inventories and either sales growth or the real interest rate in the USA during both the inter‐war and post‐World War II periods. We identify four structural shocks by combining a single long‐run restriction to identify a permanent output shock with three sign restrictions to identify demand‐ and supply‐side transitory shocks. We show that during both the inter‐war and post‐war periods the structural correlation between inventories and real interest rate conditional on identified interest rate shocks is systematically positive; the reduced‐form correlation between the two series is positive during the post‐war period, but in line with the predictions of theory it is robustly negative during the inter‐war era; during that era the correlations between inventories and either of the two other series exhibit a remarkably strong co‐movement with output at business cycle frequencies. Copyright © 2014 John Wiley & Sons, Ltd.

Tests of Financial Market Contagion: Evolutionary Cospectral Analysis Versus Wavelet Analysis

This paper examines the co-movements dynamics between OCDE countries with the US and Europe. The core focus is to suggest advantageous techniques allowing the investigation with respect to time and frequency, namely evolutionary co-spectral analysis and wavelet analysis. Our study puts in evidence the existence of both long run and short-run co-movements. Both interdependence and contagion are well identified across markets; but with slight differences. Both investors and policymakers can derive worthwhile information from this research. Recognizing countries sensitivity to permanent and transitory shocks enables investors to select rational investment strategies. Similarly, policymakers can make safe crisis management policies.

Government spending cyclicality: Evidence from transitory and persistent shocks in developing countries

We revisit the debate of whether government spending is procyclical in developing countries. Our main contribution is to argue that, beyond exogeneity of the income shock, an empirical analysis of government spending cyclicality must be carefully tailored to the shock's persistence. We first illustrate this point in a simple intertemporal model. We then use instrumental variables estimation to characterize the response of government expenditures to exogenous shocks with different degrees of persistence. Our estimation strategy exploits that: (i) year-to-year variations in rainfall have a significant positive contemporaneous effect on sub-Saharan African countries' real GDP but this effect is transitory; (ii) year-to-year variations in the GDP of sub-Saharan African countries' OECD trading partners have a significant positive contemporaneous effect on sub-Saharan African countries' real GDP and this effect is persistent. Using rainfall as an instrument for sub-Saharan African countries' GDP yields a government consumption expenditures elasticity response of around 0.4 (standard error 0.3). When the instrument is the GDP of sub-Saharan African countries' OECD trading partners the estimated government consumption expenditures elasticity response is around 1.1 (standard error 0.2). The elasticity response of government consumption expenditures to persistent income shocks is thus significantly higher relative to transitory shocks.

Fiscal Policy, Endogenous Political Uncertainty and Economic Fluctuations

We argue that when fiscal policy is endogenously determined, the incentives of redistributive politics associated with its formulation can endogenously add to the uncertainty and volatility that an economy faces. In particular, small shocks may get translated into large fluctuations. Our analysis considers a dynamic model of fiscal policy formulation and redistributive politics in which the economy's fundamentals are subject to small and transitory shocks. Though optimal fiscal policy under commitment can insulate the economy from fluctuations, we show that under endogenous policy determined by majority rule voting, the economy can transition between states of high and low redistribution with concomitant fluctuations in investment and output.

Trend Shocks and the Countercyclical U.S. Current Account

From 1960-2009, the U.S. current account balance has tended to decline during expansions and improve in recessions. We argue that trend shocks to productivity can help explain the countercyclical U.S. current account. Our framework is a two-country, two-good real business cycle (RBC) model in which cross-border asset trade is limited to an international bond. We identify trend and transitory shocks to U.S. productivity using generalized method of moments (GMM) estimation. The specification that best matches the data assigns a large role to trend shocks. The estimated model generates a countercyclical current account without excessive consumption volatility.

Hong Kong's Growth Synchronisation with China and the U.S.: A Trend and Cycle Analysis

This paper investigates the synchronisation of Hong Kong's economic growth with mainland China and the US. We identify trends of economic growth based on the permanent income hypothesis. Specifically, we first confirm whether real consumption in Hong Kong and mainland China satisfies the permanent income hypothesis, at least in a weak form. We then identify the permanent and transitory components of income of each economy using a simple state-space model. We use structural vector autoregression models to analyse how permanent and transitory shocks originating from mainland China and the US affect the Hong Kong economy, and how such influences evolve over time. Our main findings suggest that transitory shocks from the US remain a major driving force behind Hong Kong’s business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong’s trend growth.

Análise de integração e contágio financeiro na América do Sul

Este artigo agrega a discussao promovida em Mejia-Reyes (2000) e Hecq (2001) sobre integracao e contagio financeiro nos paises da America do Sul, atraves da modelagem de caracteristicas comuns no longo e no curto prazo das trajetorias de evolucao dos indices das principais bolsas de valores. Apesar da diversidade nos fundamentos macroeconomicos deste continente, os resultados sugerem os sistemas financeiros destes paises nao devam ser analisados individualmente, pois os desvios do equilibrio de longo prazo em qualquer um dos mercados financeiros sao capazes de influenciar os demais mercados em questao, durante o periodo de janeiro de 1998 e novembro de 2010. Alinhado a D'ecclesia e Costantini (2006), as evidencias no curto prazo sinalizam a presenca de contagio financeiro, mais evidente em razao de eventos extremos globais, positivos ou negativos, capazes de provocar oscilacoes de curto prazo mais acentuadas e em direcoes comuns, seguindo uma trajetoria em que se destaca o indice peruano, cujo ciclo, imprevisivel, e o unico capaz de prever o ciclo comum e os demais ciclos individuais.

Trend shocks and the countercyclical U.S. current account

AbstractFrom 1960 to 2009, the U.S. current account balance has tended to decline during expansions and improve in recessions. We argue that shocks to the trend growth rate of productivity can help explain the countercyclical U.S. current account. Our framework is a two‐country, two‐good business cycle model in which international asset trade is limited to a single, non‐contingent bond. We identify trend and transitory shocks to U.S. productivity using generalized method of moments (GMM) estimation. The specification that best matches the data assigns a large role to trend shocks. The estimated model also captures key facts regarding international co‐movement.

Labor income dynamics and the insurance from taxes, transfers, and the family

What do labor income dynamics look like over the life-cycle? What is the relative importance of persistent shocks, transitory shocks and heterogeneous profiles? To what extent do taxes, transfers and the family attenuate these various factors in the evolution of life-cycle inequality? In this paper, we use rich Norwegian population panel data to answer these important questions. We let individuals with different education levels have a separate income process; and within each skill group, we allow for non-stationarity in age and time, heterogeneous experience profiles, and shocks of varying persistence. We find that the income processes differ systematically by age, skill level and their interaction. To accurately describe labor income dynamics over the life-cycle, it is necessary to allow for heterogeneity by education levels and account for non-stationarity in age and time. Our findings suggest that the redistributive nature of the Norwegian tax–transfer system plays a key role in attenuating the magnitude and persistence of income shocks, especially among the low skilled. By comparison, spouse's income matters less for the dynamics of inequality over the life-cycle.

Should the Fed take extra action for the recent housing bubble? Evidence from asymmetric transitory shocks

The paper provides fresh implications for monetary-policy timings and effectiveness by analyzing the roles of asymmetric transitory shocks in housing, real estate investment trust (REIT), and stock price returns under the asymmetric unobserved components framework. The findings show that asymmetric transitory shocks, which characterize Markov-switching low-growth regimes of asset markets, are evidently significant for all asset price returns given the exogenous nature. Noticeably, the year 2005 is the good timing of monetary policies since asymmetric transitory shocks acted as the underlying drivers of housing price dynamics in housing markets of New York, Los Angeles, Boston, Chicago and Washington. The results suggest that two out of three conditions of extra action are satisfied before the housing crisis. However, monetary policies may fail to forestall the recent housing bubbles in New York and Los Angeles as the crisis had already occurred because adverse transitory shocks no longer persist in the two metropolitan housing markets in 2007, the year of the nationwide housing crisis.

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Transitory shocks and birth weights: Evidence from a blackout in Zanzibar

Do transitory economic shocks affect neonatal outcomes? I show that an unexpected, month-long blackout in Tanzania caused a sharp but temporary drop in work hours and earnings for workers in electricity-dependent jobs. Using records from a maternity ward, I document a reduction in birth weights for children exposed in utero to the blackout, and an increase in the probability of low birth weight. The reduction is correlated with measures of maternal exposure to the blackout. The blackout also increased fertility for teenage and first-time mothers, but selection into pregnancy cannot fully explain the drop in weights.

Income and Consumption Risk: Evidence from France

In this paper, we draw life cycle inequality profiles for cohorts born between 1921 and 1975 and observed from 1974 to 2005 from a pseudo-panel of French households. While cross-sectional inequality has not changed much over the period, the within cohort inequality has increased substantially with age. Using the interplay between income and consumption, we decompose the change in inequality into a permanent and a transitory component. The former, called income risk, measures shocks affecting income which are transmitted to consumption levels, while the latter affects income but can be smoothed and thus does not have an impact on the consumption distribution. We find that income risk increases with age, while transitory shocks remain broadly constant over a lifetime. The decomposition sheds light on the diverging trends over time between income and consumption inequality. Consumption inequality has increased since the middle of the nineties because the population has aged, and permanent shocks increase with age, while income inequality has not changed much because of negative transitory shocks that have compensated the permanents shocks. JEL: D31, D12. / KEY WORDS: Inequality, Consumption Distribution, Income Risk.

Model Disagreement and Real Bonds

This paper documents that, since the advent of inflation protected markets, there appears to be very little difference between real and nominal risk premia and argues that bond markets should be understood in terms of the real stochastic discount factor. Motivated by this observation, I study a real economy using a unique dataset on the formation of beliefs. I begin by showing that professional market forecasters display substantial heterogeneity about whether the economy is dominated by permanent or transitory shocks. Next, I study the theoretical importance of this channel in a setting where multiple agents engage in speculative trade based on their beliefs. Equilibrium term structures deviate from homogeneous economies along a number of important dimensions and can explain stylised features of the data such as low real risk free rate, positive Sharpe ratios on real bonds, and return predictability due to compensation for real risks. Finally, using survey forecasts, I provide evidence consistent with the model’s testable predictions lending support for the role of model disagreement in bond markets.

Volatility Decomposition of Australian Housing Prices

In this study, we examine the volatility pattern of Australian housing prices over an extended time frame. A component-generalized autoregressive conditional heteroscedasticity (C-GARCH) model was utilized to decompose the conditional volatility of housing prices into a “permanent” component and a “transitory” component. The results demonstrate that the shock impact on the short-run component (transitory) is much larger than the long-run component (permanent), whereas the persistence of transitory shocks is much less than permanent shocks. Moreover, both permanent and transitory volatility components have different determinants. We provide important new insights into the volatility pattern of housing prices that should enable more informed investment and government policy decision-making.