Volatility Of Macroeconomic Variables Research Articles

AN ASSESSMENT ON THE MONETARY BUSINESS CYCLE THEORY

In recent years, considerable attention has given to analyzing the business cycle in terms of money. Many researchers have developed dynamic stochastic general equilibrium models that generate business cycle facts and guide for making monetary policy decisions. The aim of this study is to investigate how the persistence of total factor productivity (TFP) and money growth shocks drive the business cycles within an economy. To achieve this aim, we employ a monetary business cycle model with a cash-in-advance constraint, as in Cooley and Hansen (1995). Our results indicate that the volatility of macroeconomic variables is higher when the persistence of TFP shocks is greater compared to that of money growth shocks. Furthermore, TFP shocks seem to have a more significant role in driving variability within the models compared to money growth shocks. This is demonstrated by the higher percentage of variance decomposition attributed to TFP shocks, except in the case of consumption variability.

Dynamic effects of monetary policy shocks on macroeconomic volatility in the United Kingdom

ABSTRACT We use constant and time-varying parameters vector autoregressive models that allow the estimation of the impact of monetary policy shocks on volatility of macroeconomic variables in the United Kingdom. Estimates suggest that an increase in the policy rate by 1% is associated with a rise in unemployment and inflation volatility of about 10% on average, with peaks observed during episodes of local and global crises.

Does the Volatility of Macroeconomic Variables Depress The Profitability of Islamic Banking?

Islamic banking in Indonesia has been growing rapidly since 2010. The profitability of Islamic bank depends on Islamic bank characteristics and macroeconomic condition. As a country with an open economy, macroeconomic conditions are very volatile. Through the theory of exchange rate pass through, the exchange rate fluctuation affects domestic prices so that it affects the profits of Islamic bank. This study analyzes the impact of the instability of the macroeconomic variables, namely the exchange rate and inflation on the profitability of Islamic bank. The instability of inflation and exchange rate are measured using the GARCH (Generalized Autoregressive Conditional Heteroskedasticity). This study applies ARDL (Autoregressive Distributed Lag Model). The data used is monthly data starting from January 2011 to June 2018. The results of the study show that the exchange rate and inflation instability depress the profitability of Islamic banki. More interestingly, instability of inflation has a greater negative impact than the instability of exchange rate on Islamic bank profit. The most Islamic bank characteristics influencing Islamic banking profit was bad financing as known as a non performing financing (NPF).

Relationship Between the Volatility of Stock Returns and the Volatility of Macroeconomic Variables: A Case of Turkey

In this paper, we examined the relationship between BIST-100 Index (SPI) and a set of macroeconomic variables volatility using Vector Autoregressive (VAR) model. The relationship between the stock market and macroeconomic variables has been subjected to serious economic research. A stock market plays important role for the reallocation of funds in many sectors of an economy. The macroeconomic factors make investors to choose the stock because investors are interested to know about the factors affecting the working of stock to manage their portfolios. Some investors show the stock prices volatility is based on directional trend in the stock prices but actually volatility is amount of fluctuation in stock prices. For this purpose we used the volatility of the variables. This study period 2006-2018 stock market using monthly data for Turkey is to examine the relationship between stock return volatility and macroeconomic volatility. We used the macroeconomic variables volatility these are industrial production (IP), money supply (M1), inflation rate (CPI), US dollar equivalent exchange rate (EX) and oil prices (OIL). We used montly data for the period between january 2006 and december 2018. Asymmetric GARCH models are used for the series volatility. The best performing GARCH model in these models are considered as volatlity. Exchange rate and industrial production index have an important effect on stock market volatility.

Uncertainty across volatility regimes

SummaryWe propose a nonrecursive identification scheme for uncertainty shocks that exploits breaks in the volatility of macroeconomic variables and is novel in the literature on uncertainty. This approach allows us to simultaneously address two major questions in the empirical literature: Is uncertainty a cause or effect of decline in economic activity? Does the relationship between uncertainty and economic activity change across macroeconomic regimes? Results based on a small‐scale vector autoregression with US monthly data suggest that (i) uncertainty is an exogenous source of decline of economic activity, and (ii) the effects of uncertainty shocks amplify in periods of economic and financial turmoil.

Indian Implied Volatility Index: A Macroeconomic Study

The study investigates the dynamic behavior of Indian implied volatility index and its time dependent conditional correlations with selected macroeconomic variables. The volatility of macroeconomic variables is likely to put burden on inflation and also influence the economic decisions as investment vehicles. Thus, the volatility of these variables has become central issue for fund managers and investors. The study uses three macroeconomic variables, oil price, gold price and federal fund rate over the period 2nd March 2009 to 30th June 2018. The Dynamic Regime-Switching model reveals that the Indian Implied volatility index exhibits two regimes high volatility and low volatility states. There exists a high degree of synchronicity between Indian VIX and oil price movement. Oil price has significant impact on India VIX during high volatile state. The result alarms the attention of monetary policy makers. The policy of oil price deregulation has to be carefully monitored.

Systematic risk factors and stock return volatility

This study analyzes the transmission of systematic risk exhaling from macroeconomic fundamentals to volatility of stock market by using auto regressive generalized auto regressive conditional heteroskedastic (AR-GARCH) and vector auto regressive (VAR) models. Systematic risk factors used in this study are industrial production, real interest rate, inflation, money supply and exchange rate from 2000-2014. Results indicate that there exists relationship among the volatility of macroeconomic factors and that of stock returns in Pakistan. The relationship among the volatility of macroeconomic variables and that of stock returns is bidirectional; both affect each other in different dynamics.
 JEL code: C32, C58, G11, G12

Modelling Sovereign Credit Spreads with International Macro-Factors: The Case of Brazil 199882009

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence. It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy. The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates. The Brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables. These results suggest that the macro-finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk.

The Relationship between Macroeconomic Variables and FTSE Bursa Malaysia Kuala Lumpur Composite Index

This study aims to examine the relationship between top ten constituents in FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) with a set of macroeconomic variables and industrial production using Johansen co-integration test. This study also analyzes the respond of each macroeconomic variable on the stock indices using Impulse Response Function (IRF) and forecast error decomposition. The findings show a long-run relationship between each stock index in FBM KLCI with macroeconomic variables and that the shocks of stock indices on its own shock contribute the largest portion followed by money supply. In addition, we apply GARCH (1, 1) model to determine which macroeconomic affects volatility of stock indices. The result shows that macroeconomic volatility does not affect much on Genting and IHH Healthcare, but Public Bank Bhd, Tenaga Nasional, Malayan Banking, CIMB Group Holdings, Axiata Group Bhd, Petronas Chemicals Group Bhd are affected by the volatility of macroeconomic variables.

Oil and Macroeconomic (In)Stability

We analyze the role of oil price volatility in reducing U.S. macroeconomic instability. Using a Markov Switching Rational Expectation New-Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role.

Oil and Macroeconomic (In)Stability

We analyze the role of oil price volatility in reducing US macroeconomic instability. Using a Markov Switching Rational Expectation New Keynesian model we revisit the timing of the Great Moderation and the sources of changes in the volatility of macroeconomic variables. We find that smaller or fewer oil price shocks did not play a major role in explaining the Great Moderation. Instead oil price shocks are recurrent sources of economic fluctuations. The most important factor reducing overall variability is a decline in the volatility of structural macroeconomic shocks. A change to a more responsive (hawkish) monetary policy regime also played a role. (JEL E12, E23, E52, Q35, Q43)

Relationship between Macroeconomic Factors Volatility and Stock Return Volatility: Evidence from Pakistan

This study analyzes the transmission of systematic risk exhaling from macroeconomic fundamentals to volatility of stock market by using auto regressive generalized auto regressive conditional heteroskedastic (AR-GARCH) and vector auto regressive (VAR) models. Macroeconomic factors used in this study are industrial production, real interest rate, inflation, money supply and exchange rate from 2000-2014. Finally this study shows that in Pakistani scenario there exist relationship among the volatility of macroeconomic factors and that of stock returns. The relationship among the volatility of macroeconomic variables and that of stock returns is bidirectional; both of these affect each other in different dynamics.

The Trilemma Policies and Macroeconomic Volatility in Central and Eastern Europe

In this paper we search for evidence on the consequences of the trilemma policies on the volatility of macroeconomic variables in selected CEE countries, members of European Union. This problem gained a significant importance during recent financial crisis, when countries in this part of the world were confronted with uncertainty regarding their macroeconomic evolution. We use the trilemma indexes built by Aizenman, Chinn and Ito (2011) to test the consequences of the policies on the inflation and output volatility. Our results show that capital mobility has a positive impact on reducing the macroeconomic volatility in Central and Eastern Europe.

Responses of Monetary Authorities in Emerging Economies to International Financial Crises: What Do We Really know?

1. Introduction The empirical literature on business cycles and crises in emerging markets (see, for instance, Kose and Prasad, 2010; Claessens et al., 2011) exhibits two main features. First, the volatility of macroeconomic variables tends to be higher in developing and emerging economies relative to advanced countries (2). Interestingly, the effects of globalization have accentuated this volatility gap, mainly between advanced economies and emerging countries. Second, if, over the period 1978-2007 Kose and Prasad (2010) find no noticeable difference between emerging and advanced countries in terms of recessions duration, they show that their amplitude is three times larger in emerging markets relative to advanced economies. In addition, emerging economies suffer from larger cumulative output losses while recessions associated with financial crises exert stronger negative influences on macroeconomic variables. Such stylized facts must be joined with the fact that severe financial crises exert long-lasting negative effects on growth (Cerra and Saxena, 2008; Balakrishnan et al., 2011). From this perspective, an important question is to determine what are the policy options available for emerging economies to cope with the financial crises. In other words, how do emerging markets respond to financial crises? A seminal paper on this question has been published by Kaminsky et al. (2005). Considering a large sample of 104 advanced and developing countries for the period 1960-2003, they show that if net capital inflows are pro-cyclical in the two groups of countries, their economic policy differ. Developing countries exhibit pro-cyclical fiscal and monetary policies, amplifying the destabilizing effects of capital inflows. At the opposite, in OECD countries, authorities conduct counter-cyclical policies that mitigate the negative effects on output of capital flows. Kaminsky et al. (2005) identify several factors that can explain the adoption of pro-cyclical policies in emerging countries: political distortions, weak institutions, and capital markets imperfections. The global financial crisis of 2008-09 had led to a renewed interest of the analysis concerning economic policies responses in emerging countries to financial crises (See, for instance, Ghosh et al., 2009; IMF, 2010a). It is important to keep in mind that two main features distinguish the current episode from the crises of the late 1990s and early 2000s. On the one hand, the main trigger of the crisis is a shock originated in the financial sector of advanced countries. After an initial period of resilience, the financial turmoil in advanced economies hit emerging markets in late 2008. On the other hand, this crisis is characterized by an exceptional synchronization at a worldwide level. Interestingly, a growing number of studies have provided new empirical evidences according to which emerging economies tend to adopt more frequently counter-cyclical policies to face crises (3). Vegh and Vuletin (2012) study the cyclical components of short-term interest rates and real GDP for 68 countries over the period 1960-2009 (4). They find that from 1960 to 1999, 51 percent of developing countries pursued pro-cyclical monetary policy (i.e., a negative correlation between the short-term interest and the GDP cyclical components) while over the period 2000-2009, around 77 percent of these countries conducted counter-cyclical monetary policy (i.e., a positive correlation between the short-term interest and the GDP cyclical components). Coulibaly (2012) analyzes the behavior of monetary policy during financial and economic crises over a sample of 188 countries from 1970 to 2009. Monetary policy stance is measured with short-term interest rates. A decline in the interest rate in the year of the crisis relative to the previous year signals a counter-cyclical monetary policy. While in the 1990s, around 55 percent of emerging economies lowered their interest rate during crises episodes, this share increased to 70 percent during 2000s, and reached 80 percent in 2008-2009. …

Has India emerged? Business cycle stylized facts from a transitioning economy

This paper presents a comprehensive set of stylized facts for business cycles in India from 1950 to 2010. We show that most macroeconomic variables are less volatile in the post reform period, even though the volatility of macroeconomic variables is still high and similar to other emerging market economies. Consistent with other emerging market economies, relative consumption volatility has gone up in the post reform period. In terms of co-movement and persistence however, India looks similar to advanced economies, and less like other emerging market economies. We report evidence that these changes are driven primarily by structural changes caused by market oriented reforms, and not by “good luck.”

Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence. It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy. The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates. The Brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables. These results suggest that the macro-finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk.

When do forecasters disagree? An assessment of German growth and inflation forecast dispersion

Based on a panel of German professional forecasts for 1970–2004 we analyse the dispersion of growth and inflation forecasts. Forecast dispersion varies over time and is particularly high before and during recessions. There is no clear link between forecast dispersion and the subsequent forecast error. Forecast dispersion is positively correlated with the volatility of macroeconomic variables, but not necessarily with the level of the same variables. We interpret this finding to be evidence in favour of the notion that forecasters do not share a common belief about what is an adequate model of the economy. In particular, the assessment of the effects of monetary policy seems to be the prime suspect for diverging beliefs regarding an appropriate model of the economy.