Intra- and international risk-sharing in the short run and the long run

We investigate empirically how industrialized countries and US states share consumption risk at horizons between 1 and 30 years. US federal states share about 50% of their permanent idiosyncratic risk through cross-state capital income flows. While insurance against transitory fluctuations in output is virtually complete, OECD countries do not share any of their permanent idiosyncratic risk. Our results suggest that purely transaction cost based theories cannot explain the home bias, since the potential welfare gains from insurance against permanent shocks would by far outweigh that of insuring against transitory variation. We conclude that permanent and transitory shocks constitute two qualitatively different kinds of risk and that various forms of endogenous market incompleteness may render permanent shocks a lot harder to insure, in particular at the international level.     

‘I’ve been to Bali too’ (and I will be going back): are terrorist shocks to Bali's tourist arrivals permanent or transitory?

International visitor arrivals to Bali are examined using univariate and panel Lagrange multiplier (LM) unit root tests with one and two structural breaks to ascertain if shocks to the time path of tourist arrivals are permanent or transitory. The univariate LM unit root tests with one and two structural breaks fail to reject the null hypothesis of a unit root in international visitor arrivals to Bali. However, the panel LM unit root tests with one and two structural breaks applied to a panel of Bali's 11 major source markets reject the null and support the alternative hypothesis of a joint trend-stationary series with transitory shocks. This result suggests that, the effects of the recent terrorist acts on Bali on the growth path of tourist arrivals from major markets are only transitory and that as a consequence Bali's tourism sector is sustainable in the long run.     

Plucking models of business cycle fluctuations: Evidence from the G-7 countries

Friedman's `plucking' model, in which output cannot exceed a ceiling level but is occasionally plucked downward by recessions, is tested using Kim and Nelson's formal econometric specification on output data from the G-7 countries. Considerable support for the model is obtained, leading us to conclude that during normal periods, output seems to be driven mostly by permanent shocks, but during recessions and high-growth recoveries, transitory shocks dominate. During these periods macroeconomic models that emphasise demand-oriented shocks, rather than real business cycle type models, may thus be more appropriate. First Version Received: September 2000/Final Version Received: May 2001     

Inequality and the business cycle: evidence from U.S. survey data

ABSTRACT

We study the effects of macroeconomic shocks on measures of economic inequality obtained from U.S. survey data. To identify aggregate supply, aggregate demand, and monetary policy shocks, we estimate vector autoregressions and impose sign and zero restrictions on impulse response functions. We find that the effects of the macroeconomic shocks on inequality depend on the type of shock as well as on the measure of inequality considered. Contractionary monetary policy shocks increase expenditure and consumption inequality, whereas income and earnings inequality are less affected. Adverse aggregate supply and demand shocks increase income and earnings inequality, but reduce expenditure and consumption inequality. Our results suggest that different channels dominate in the transmission of the shocks. The earnings heterogeneity channel is consistent with the inequality dynamics after monetary policy shocks, but it appears to be less crucial when the economy is hit by either aggregate supply or aggregate demand shocks. Using variance decompositions, we find that although the macroeconomic shocks account for large shares of the variation in the macroeconomic variables, their contributions to the dynamics of the inequality measures are limited.     

Inequality and volatility moderation in Russia: Evidence from micro-level panel data on consumption and income

We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994–2005. We analyze cross-sectional income and consumption inequality trends and find that inequality decreased during the 2000–2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Finally, expenditure and income inequality in Russia are not far apart.     

News shocks and labour market dynamics in matching models

We enrich a baseline real business cycle (RBC) model with search and matching frictions on the labour market and real frictions that are helpful in accounting for the response of macroeconomic aggregates to shocks. The analysis allows shocks to have an unanticipated and a news (i.e., anticipated) component. The Bayesian estimation of the model reveals that the model that includes news shocks on macroeconomic aggregates produces a remarkable fit of the data. News shocks in stationary and non‐stationary TFP, investment‐specific productivity and preference shocks significantly affect labour market variables and explain a sizeable fraction of macroeconomic fluctuations at medium‐ and long‐run horizons. Historically, news shocks have played a relevant role for output, but they have had a limited influence on unemployment.     

两种冲击视角下中国城乡经济波动福利成本研究*

经济波动福利成本的准确测算，一方面能够对经济波动根源的差异化理论做出评判，另一方面也直接关系到政府对于经济政策的选择。本文基于Lucas福利成本模型，采用BN分解公式对消费序列进行分解，估计了暂时性冲击和持久性冲击所造成的经济波动福利成本。本文研究证实，持久性冲击所造成的经济波动福利成本远大于暂时性冲击所造成的福利成本，避免不利供给因素所带来的持久性冲击，是增进城乡居民福祉的重要举措。这与当前所实施的“供给侧结构性改革”相契合。     

国际原油价格波动对中国宏观经济影响的重新考察

本文对国际原油价格波动对中国宏观经济的影响进行了重新考察。研究发现:国际原油价格通过影响采购经理人指数进而影响中国主要宏观经济变量,采购经理人指数的引入,完善了国际原油价格波动对中国宏观经济影响的时序传导机制,从而提高了实证结果的显著性。实证结果显示:国际原油价格上涨对中国消费者价格指数有正向影响,但这一结果并不显著;同时国际原油价格上涨并未改变中国经济增长的总体态势。VEC实证模型的估计结果表明:国际原油价格与中国宏观经济变量之间存在显著的协整关系,而且国际原油价格波动对中国宏观经济的影响存在滞后效应。     

The HUMP-shaped behavior of macroeconomic fluctuations

We analyze the nature of persistence in macroeconomic fluctuations. The current view is that shocks to macroeconomic variables (in particular realGNP) have effects that endure over an indefinite horizon. This conclusion is drawn from the presence of a unit root in the univariate time series representation. Following Perron (1989), we challenge this assessment arguing that most macroeconomic variables are better construed as stationary fluctuations around a breaking trend function. The trend function is linear in time except for a sudden change in its intercept in 1929 (The Great Crash) and a change in slope after 1973 (following the oil price shock). Using a measure of persistence suggested by Cochrane (1988) we find that shocks have small permanent effects, if any. To analyze the effects of shocks at finite horizon, we select a member of theARMA(p, q) class applied to the appropriately detrended series. For the majority of the variables analyzed the implied weights of the moving-average representation have the once familiar humped shape.     

Do global CO2 emissions from fossil-fuel consumption exhibit long memory? a fractional-integration analysis

In this article we use an autoregressive fractionally integrated moving average approach to measure the degree of fractional integration of aggregate world CO₂ emissions and its five components – coal, oil, gas, cement, and gas flaring. We find that all variables are stationary and mean reverting, but exhibit long-term memory. Our results suggest that both coal and oil combustion emissions have the weakest degree of long-range dependence, while emissions from gas and gas flaring have the strongest. With evidence of long memory, we conclude that transitory policy shocks are likely to have long-lasting effects, but not permanent effects. Accordingly, permanent effects on CO₂ emissions require a more permanent policy stance. In this context, if one were to rely only on testing for stationarity and non-stationarity, one would likely conclude in favour of non-stationarity, and therefore that even transitory policy shocks have permanent effects. Our fractional-integration analysis highlights that this is not the case.     

Materials price increases and aggregate adjustment in an open economy: A Stochastic Approach

This paper develops a stochastic macroequilibrium frameworks to analyze the differing implications of alternative types of input price disturbances. The distinctions between expected and unexpected, permanent and transitory, nominal and real disturbances are considered. The introduction of input disturbances involves a more elaborate modelling of the supply side of the economy. Both constant returns to scale and decreasing returns to scale technologies are considered. The analysis highlights the sensitivity of the macroeconomic impacts of input price shocks to their specific type. The analytical results obtained are not unambiguous and are supplemented with numerical simulations.     

Final Energy Demand in Portugal: How Persistent it is and Why it Matters for Environmental Policy

ABSTRACT

The objective of this paper is to examine the degree of persistence in final energy demand in Portugal. Our results suggest that when structural breaks are accounted for, aggregate energy demand and all of its components are stationary. Accordingly, the response to shocks is not permanent. We find, however, strong levels of persistence. Demand for electricity is the most persistent component of aggregate demand while the levels of persistence for petroleum and gas are similar and close to the aggregate level. In turn, demand for coal and biomass are also similar and the least persistent. These results have important implications for the design of macroeconomic policies. Indeed, high persistent levels mean that temporary energy shocks translate into persistent changes in energy demand and thereby in less transient shocks to the overall economy. These results are also important for the design of environmental policies. The fact that energy demand is highly persistent means that the effects of environmental policies will tend to be long lasting. Also, the relatively high persistence of electricity, gas and petroleum and the fact that their levels of persistence are similar suggests that fuel switching policies involving these fuels will be relatively easy to implement.     

Aggregate demand shocks and economic growth

The traditional view of growth and fluctuations implies that aggregate demand shocks result in only transitory departures from trend or “normal” output, which is determined exclusively by aggregate supply factors. Using a simple dynamic framework for a less-developed economy, a series of models is developed to show that aggregate demand can have a permanent effect on economic growth. It is shown that even if the economy converges to some “normal” path, this path itself may be altered by large demand shocks, due to increasing returns and hysteresis effects in labor markets and balance of payments constraints. It is also shown that the economy may not converge to its “normal” path, in which case fiscal and monetary policy will have long-term effects on output and growth.     

From income to consumption: measuring households partial insurance

This article computes the degree of consumption insurance with respect to transitory and permanent income shocks. The lack of income–consumption data in the US surveys forces researchers to use an empirical strategy to impute consumption. This procedure is avoided by using the Spanish Household Budget Continuous Survey, which contains true panel data on consumption and income information in the same survey. We find full insurance for transitory income shocks and partial insurance for permanent shocks for some sub-groups. For the full sample, a 10% permanent income shock induces a 4.8% permanent change in consumption, with higher insurance capacity for college, home-owner and high-wealth households. We also compute the role of durables and family income transfers as smoothing devices. The comparison of insurance level when based on true consumption data versus imputed consumption data shows that the use of imputed consumption underestimates permanent insurance.     

DO PERMANENT SHOCKS EXPLAIN INCOME LEVELS? A COMMON CYCLE–COMMON TREND ANALYSIS OF REGIONAL INCOME LEVELS FOR CHINA

Abstract. In this paper, we analyse per capita income levels of China's three main regions: the western region, the eastern region and the central region using common cycle and common trend tests. Our main contribution is that we impose the common cycle and common trend restrictions in decomposing shocks into permanent and transitory components. We find that: (i) there is evidence for two cointegrating relationships and one common cycle; and (ii) the variance decomposition analysis of shocks provides evidence that over short horizons, permanent shocks play a large role in explaining variations in regional per capita incomes.     

Revisiting the relationship between exchange rates and fundamentals

In this paper, we apply the permanent–transitory decomposition method to analyze the role of permanent and transitory shocks in explaining the apparent weak link between nominal exchange rates and economic fundamentals. The results suggest that for most of the countries we investigate, including Finland, Italy, Portugal, France and Switzerland, transitory shocks dominate exchange rate fluctuations, while permanent shocks dominate the variations in economic fundamentals. The findings therefore provide an alternative interpretation of the “exchange rate disconnect puzzle”. Moreover, the results also suggest that comprehensive modeling of transitory components in empirical models should not be neglected in studies of the dynamics of exchange rates.     

International macroeconomic dynamics: A factor vector autoregressive approach

In this paper international comovements among a set of key real and nominal macroeconomic variables in the US, UK, Canada, Japan and the Euro area have been investigated for the 1980–2005 period, using a factor vector autoregressive approach. We present evidence that comovements in macroeconomic variables do not concern only real activity, but are an important feature also of stock market returns, inflation rates, interest rates and, to a smaller extent, monetary aggregates. Both common sources of shocks and similar transmission mechanisms explain international comovements, with the only exception of Japan, where the idiosyncratic features seem to dominate. Finally, concerning the origin of global shocks, evidence of both global supply-side and demand-side disturbances is found.     

Macroeconomic fluctuations: Demand or supply, permanent or temporary?

We use generalized method of moments to estimate a rational expectations aggregate demand/aggregate supply macroeconomic model for five European economies and the United States. Our aim is to examine whether supply or demand shocks have predominated in these economies during the post-war era, and whether shocks of either type have been primarily temporary or permanent in nature. We find that permanent or temporary demand shocks have been the dominant source of variance in output growth in all six countries, but there is a less consistent pattern for inflation. Permanent supply shocks had the dominant influence on autocorrelations.     

The role of education and household composition for transitory and permanent income inequality–evidence from PSID data

Transitory and permanent shocks to income have been shown to be important determinants of household consumption. This paper shows that there are significant differences in the trends of transitory and permanent income inequality between demographic groups since the 1980s. Using data from the Panel Study of Income Dynamics, educational attainment and the composition of a household are found to play a key role. While permanent inequality increases steadily for educated households, it is flat over large parts of the sample period for the less educated households. Transitory inequality increases for all households headed by couples whereas it is constant for single households. Altogether, permanent shocks account for a larger part of the income variance of educated households whereas transitory shocks are relatively more important for the less educated. These results are able to shed light on the transmission of changes in income inequality to consumption inequality.     

Incomplete markets and the output–inflation tradeoff

This paper analyses the effects of money shocks on macroeconomic aggregates in a tractable flexible-price, incomplete-markets environment that generates persistent wealth inequalities amongst agents. In this framework, current inflation redistribute wealth from the cash-rich employed to the cash-poor unemployed and induce the former to increase their labour supply in order to maintain their desired levels of consumption and precautionary savings. If the shocks are persistent, however, they also raise inflation expectations and thus deter the employed from saving and supplying labour. We relate the strength of these two inflation taxes to the underlying parameters of the model and study how they compete in determining the overall sign and slope of the implied ‘output–inflation tradeoff’ relation.