The spillover effect of the US uncertainty on emerging economies: a panel VAR approach

The article quantifies the spillover effects of the United States’ (US) uncertainty shocks on emerging economies, using a panel VAR model. We find that the US uncertainty shocks are the risks, and hence drop the capital inflow, investment, consumption, export and output of emerging economies. This also induces a depreciation of emerging market currencies. As a result, our model predicts a fall in short-term interest rate of emerging economies to react against the US uncertainty shocks. Our findings partly help explain the slow recovery of the world economy after the 2008–2009 global financial crisis.     

Unemployment dynamics in emerging countries: Monetary policy and external shocks

This paper quantifies the impact of three key external shocks – external demand, interest rate, and uncertainty shocks – on emerging market economies (EMEs). We find that external shocks have a sizeable impact on macroeconomic fluctuations in EMEs and that a considerable fraction of this impact is through the domestic stock market. A decrease in external demand and an increase in external interest rate and uncertainty lead to a higher unemployment rate, lower stock market return, and a depreciation of the domestic currency. The EMEs' monetary policy actively responds to external shocks and dampens their impact on domestic activity.     

ASIAN BUSINESS CYCLE SYNCHRONIZATION

This paper develops a multilevel structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural vector autoregression with a multilevel factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering 9 emerging Asian economies and G‐7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that although the role of the global factors has intensified over the past 15 years for most of the economies, output fluctuations in Asia have remained less synchronized with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Therefore, although emerging Asian economies cannot ‘decouple’ completely from the advanced economies, they have, nonetheless, sustained a strong independent cycle among themselves. We also find that synchronized supply shocks contributed more to the observed synchronization in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement and transmission of other supply shocks through, for example, vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronization in emerging Asia.     

“When it rains,it pours”: Fiscal policy,credit constraints and business cycles in emerging and developed economies

Fiscal procyclicality, meaning co-movement between government expenditure and macroeconomic fundamentals, is an important feature of business cycle dynamics for emerging and poor economies. I estimate a panel SVAR to investigate the reasons for fiscal procyclicality. The analysis sheds light on the role of external financial constraints in shaping fiscal policy. My findings suggest that the response of emerging governments to output fluctuations is similar to that of developed governments. However, emerging governments curtail spending in response to increases in the sovereign borrowing rate, which forces their consumption expenditure to act more procyclically. Using counterfactual analysis, I show that the key forces behind fiscal procyclicality are the sensitivity of government spending to international borrowing costs and the procyclical nature of these costs for emerging economies.     

The Vulnerability of ASEAN+3 Countries to International Financial Crises

This article focuses on the reaction of the Association of Southeast Asian Nations (ASEAN) economies to international financial shocks. The crises in emerging markets at the end of the last century underlined the significant vulnerability of the emerging ASEAN economies to international financial fluctuations and a lack of sustainability in their exchange rate regime. A structural VAR model is used to analyze the efficiency of the measures adopted by these countries after this episode of crisis in order to protect their economies against speculative attacks. The results reveal that the impact of the recent subprime crisis on emerging ASEAN countries is less significant than that observed in industrialized ones.     

ON THE SOURCES OF AGGREGATE FLUCTUATIONS IN EMERGING ECONOMIES

Recent research on macroeconomic fluctuations in emerging economies has advocated introducing a stochastic productivity trend or allowing for interest rate shocks and financial frictions. We estimate a model that encompasses these two approaches, shedding light on their relative merits and on how financial frictions affect the transmission of shocks. The model accounts for aggregate fluctuations by assigning a dominant role to financial frictions in amplifying conventional (temporary) productivity shocks, whereas trend shocks play a minor role. A link between spreads and expected future productivity emerges as essential for a reasonable approximation to the data.     

Monetary policy and commodity terms of trade shocks in emerging market economies

Commodity terms of trade shocks have continued to drive macroeconomic fluctuations in most emerging market economies. The volatility and persistence of these shocks have posed great challenges for monetary policy. This study employs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the optimal monetary policy responses to commodity terms of trade shocks in commodity dependent emerging market economies. The model is calibrated to the South African economy. The study shows that CPI inflation targeting performs relatively better than exchange rate targeting and non-traded inflation targeting both in terms of reducing macroeconomic volatility and reducing the losses of a non-benevolent central bank. However, macroeconomic stabilisation comes at a cost of increased exchange rate volatility. The results suggest that the appropriate response to commodity induced exogenous shocks is to target CPI inflation.     

Cyclical wage movements in emerging markets compared to developed economies: The role of interest rates

This paper documents that, at the aggregate level, (i) real wages are positively correlated with output and, on average, lag output by about one quarter in emerging markets, while there are no systematic patterns in developed economies, and (ii) real wage volatility (relative to output volatility) is about twice as high in emerging markets compared with developed economies. We then present a small open economy model with productivity shocks and countercyclical interest rates. The model incorporates a working capital requirement and the Jaimovich and Rebelo (2009) preference that allows for flexible parameterization of the strength of income effects on labor supply. The model can account for the high volatility of wage and consumption relative to output and countercyclical trade balances that characterize emerging-market economies. During economic downturns, rising interest rates in emerging markets induce relatively large income effects on labor supply, so households would not reduce their labor input as much even though wages drop significantly.     

Consumption smoothing and the welfare consequences of social insurance in developing economies

Studies of risk in developing economies have focused on consumption fluctuations as a measure of the value of insurance. A common view in the literature is that the welfare costs of risk and benefits of social insurance are small if income shocks do not cause large consumption fluctuations. We present a simple model showing that this conclusion is incorrect if the consumption path is smooth because individuals are highly risk averse. Hence, social safety nets could be valuable in low-income economies even when consumption is not very sensitive to shocks.     

Uninsured idiosyncratic risk, liquidity constraints and aggregate fluctuations

Summary. I study the role played by uninsured idiosyncratic risk and liquidity constraints in the propagation of aggregate fluctuations. To this purpose, I compare the aggregate fluctuations of two model economies that differ in their insurance technologies only. In one of these model economies liquidity constrained households vary their holdings of a nominally denominated asset in order to buffer an uninsured idiosyncratic shock to their individual production opportunities. In the other economy every idiosyncratic component of risk can be costlessly insured. I find that the limited insurance technology implies fluctuations in output that are 20% larger, fluctuations in hours relative to output that are 9% larger, fluctuations in consumption relative to output that are 18% smaller, and a correlation of hours and productivity that is 15% smaller than those that obtain under the full insurance technology. Received: March 6, 1996; revised version August 15, 1996     

Impact of oil price shocks on output,inflation and the real exchange rate: evidence from selected ASEAN countries

This article analyses the impact of oil price shocks on real output, inflation and the real exchange rate in Thailand, Malaysia, Singapore, the Philippines and Indonesia (ASEAN-5) using a Structural VAR model. The cointegration tests indicate that the macroeconomic variables of these countries are cointegrated and share common trends in the long run. The impulse response functions reveal that oil price fluctuations do not impact the ASEAN-5 economies in the long run and much of its effect is absorbed within five to six quarters. The variance decomposition results further assert that with a few exceptions oil price shocks do not explain a significant variation in any of the variables under consideration. We also identify a very unique pattern of response to oil price fluctuations between Malaysia and Singapore and between the Philippines and Thailand. The pairs exhibit a high degree of similarity in their responses; they do not share any commonalities across the group.     

对外开放和经济波动的关联性检验——中国和东亚新兴市场国家的案例

本文运用研究非对称性冲击问题的实证方法考察和比较了东亚4国(韩国、印尼、泰国和中国)在经济开放过程中内外金融资源的相对价格——实际利差的变化及由此引起的宏观经济(产出、货币和银行信贷)的波动特征。这一研究的政策意义在于通过区分外部因素的基本面(mean)变化和突发性的波动(volatility)对本国经济所产生的不同性质的溢出效应(spillover),为政府制定不同的针对性措施提供理论根据。通过引入非对称“时变波动”(asymmetrictimevaryingvolatility)特征的二元EGARCHVAR实证模型,论文得到了三个主要结论第一,虽然为维持名义汇率的稳定,各国政府都积极地干预外汇市场,由此影响了当期内外利差的收敛,但包括中国在内的4个国家金融的实际开放程度都在不断加大。第二,除上世纪90年代国际资本移动的鼎盛阶段外,各国的经济波动并不是由外部冲击直接带来的,而是国内经济的不确定因素导致的。第三,比较各国经济波动特征,可以发现汇率制度、金融市场的开放程度以及资本市场的发展状况对经济波动有很大的影响。     

Interest rate volatility and macroeconomic dynamics: Heterogeneity matters

We examine the relation between real interest rate volatility and aggregate fluctuations for a diverse sample of countries. Compiling a new dataset including emerging and advanced countries, the substantial variation in our data yields novel results: (a) stochastic volatility outperforms Markov‐switching in representing interest rates, (b) some advanced economies can be more volatile than emerging markets, and (c) creditors take on more debt following volatility shocks. We show how an equilibrium business cycle model with uncertainty shocks can generate these facts. Sample heterogeneity produces significant parameter differences, playing an important role in distinguishing the effects of volatility shocks.     

Sudden stops and output: an empirical Markov switching analysis

Sudden stops and their negative effects on GDP have recently received increased attention because quantitative easing has led to substantial capital inflows into emerging economies. We extend the empirical literature on the impact of sudden stops on GDP by proposing an alternative econometric approach which is multivariate, nonlinear and uses a novel way to identify sudden stops. We estimate a Markov switching vector autoregression with a latent variable indicating whether the economy is in a sudden stop regime. We use the maximum fraction of forecast error variance approach for partial structural identification of the vector autoregression model. Beyond confirming findings from the existing empirical literature on sudden stops, our results additionally show that (i) sudden stops are associated with regime switches (i.e., breaks in the behavior of economic variables), which have significantly negative and permanent effects on GDP; (ii) impulse responses to net capital inflow shocks are regime dependent with economies being more vulnerable to shocks during the sudden stop regime; and (iii) there were different main drivers of the output decline in historical sudden stop episodes.     

Output stabilization in fixed and floating regimes: Does trade of new products matter?

This paper studies the dynamics of output and export margins in the aftermath of global shocks in fixed and floating exchange rate regimes. Using a panel vector autoregressive model with exogenous factors, it traces the mean responses of output, terms of trade, extensive and intensive margins to real and nominal shocks in 22 developed economies over the period 1988–2011. We find remarkable differences in the transmission of shocks across exchange rate regimes. Adjustment takes place mainly at the extensive margin in fixed regimes, and implies a crowding out of intensive margins that is not present among floaters. Large movements at the extensive margin are associated with a weaker performance in terms of output stabilization. Our findings are robust to alternative sample selections and identification of the shocks. The evidence in the paper stresses a novel advantage of flexible exchange rates based on their ability to smooth the fluctuations in trade of new products.     

GLOBAL BUSINESS CYCLES: CONVERGENCE OR DECOUPLING?*

We analyze the evolution of the degree of global cyclical interdependence over the period 1960–2008. Using a dynamic factor model, we decompose macroeconomic fluctuations in output, consumption, and investment into a global factor, factors specific to country groups, and country‐specific factors. We find that during 1985–2008, there is some convergence of business cycle fluctuations among industrial economies and among emerging market economies. Surprisingly, there is a concomitant decline in the relative importance of the global factor. We conclude that there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.     

MARKUPS AND THE REAL EFFECTS OF VOLATILITY SHOCKS

This article studies the role of endogenous markups in the transmission of volatility shocks in real models. I design a variant of a small open economy model with volatility shocks and firm dynamics that gives rise to endogenous markups. I calibrate this model to match the business cycle facts in emerging economies and show that the impact of volatility shocks is substantially amplified if markups are endogenously time varying. Volatility shocks increase savings, due to precautionary motives, and markups, which act as a wedge that endogenously decreases real wages and labor supply with further negative aggregate dynamics that are absent in the models with constant markups.     

NOMINAL SOVEREIGN DEBT

I show that reputation alone can sustain nominal sovereign debt, which is subject to both the risks of default and opportunistic devaluations. Nominal debt combined with a countercyclical exchange rate policy allows more hedging against shocks than real savings if markets are incomplete. Thus, the loss of either repayment or monetary reputation severely affects the government's ability to smooth consumption. The model offers a simple explanation for the Bulow and Rogoff critique, while simultaneously helping explain the issuance of nominal sovereign bonds by emerging economies. The model also helps explain why many governments borrow and save at the same time.     

THE ROLE OF HOUSE PRICES IN THE MONETARY TRANSMISSION MECHANISM ACROSS EUROPEAN COUNTRIES

This paper provides a discussion of the ‘housing market’ channels of the monetary transmission mechanism and offers some evidence of institutional differences in the European housing and mortgage markets. Using a number of Vector Autoregressive models, estimated individually for nine European countries over the pre‐EMU period, we find that house prices are significantly affected by interest rate shocks. The relative role of these interest‐rate‐induced fluctuations in house prices for private consumption is then investigated. We show that house prices may enhance the effects of interest rate shocks on consumer spending in those economies where housing and mortgage markets are relatively more developed and competitive.     

Human Development at Risk: Economic Growth with Pollution-Induced Health Shocks

Risks to human health stemming from polluted air, water, and soil are substantial, especially in the rapidly growing economies. The present paper develops a theoretical framework to study an endogenously growing economy which is subject to pollution-induced health shocks with the health status being an argument of the welfare function. Pollution, arising as a negative externality from production, adversely and randomly affects the regeneration ability of a human body leading to a decline in the overall health status of the population. We include two types of uncertainty surrounding the health status: continuous small-scale fluctuations, driven by the Wiener process, and large-scale shocks or epidemics, driven by the Poisson process. We derive closed-form analytical solutions for the optimal abatement policy and the growth rate of consumption. Devoting a constant fraction of output to emissions abatement delivers the first-best allocation. This fraction is an increasing function of total factor productivity, polluting intensity of production, and damage intensity of both continuous and jump-type shocks. A higher frequency of jumps also calls for more vigorous abatement policies. By contrast, the optimal growth rate of the economy is decreasing in the frequency and intensity of shocks and in the polluting intensity of output. The efficiency of abatement technology has, in general, an ambiguous bearing on both the growth rate and on the abatement share due to the opposing forces of the direct and indirect effects.