Uncertainty and the Great Recession

Has heightened uncertainty been a major contributor to the Great Recession and the slow recovery in the United States? To answer this question, we identify exogenous changes in six uncertainty proxies and quantify their contributions to GDP growth and the unemployment rate. The answer is no. In total we find that increased macroeconomic and financial uncertainty can explain up to 10% of the drop in GDP at the height of the recession and up to 0.6 percentage points of the increased unemployment rates in 2009 through 2011. Our calculations further suggest that only a minor part of the rise in popular uncertainty measures during the Great Recession was driven by exogenous uncertainty shocks.     

How do socially controversial companies do during a stressful time? Evidence from the Great Recession

This study investigates the performance of socially controversial companies during a financial crisis. Companies are usually considered controversial if they are involved in controversial businesses such as alcohol, tobacco, firearms, nuclear etc. The results show that controversial firms exhibit higher firm value as well as better accounting performance during the Great Recession than otherwise similar, albeit non-controversial, firms. The results are consistent with the notion that the demand for controversial products remains relatively stable even during a stressful time. Further analysis confirms the results, including random-effects analysis, GMM dynamic panel data analysis, and instrumental-variable (IV) analysis. The results of this paper are particularly relevant to portfolio management, where controversial firms may be added to portfolios to inoculate them from a negative shock brought about by an economic crisis.     

Time Variation in Macro‐Financial Linkages

We analyze the contribution of credit spread, house and stock price shocks to the US economy based on a time‐varying parameter vector autoregressive model. We find that the contribution of financial shocks to gross domestic product growth fluctuates from about 20% in normal times to more than 50% during the Great Recession. The Great Recession and the subsequent weak recovery can largely be traced back to negative housing shocks. Housing shocks have become more important for the real economy since the early 2000s, and negative housing shocks are more important than positive ones. Unexpected increases in credit spreads have not been deflationary recently. Copyright © 2016 John Wiley & Sons, Ltd.     

Negative home equity,economic insecurity,and household mobility over the Great Recession

This paper uses data from the 2007–09 Survey of Consumer Finances panel to examine U.S. households’ decisions to move during the Great Recession and the role of negative home equity and economic shocks, such as job loss, in these decisions. The recession's effects are nonetheless apparent in the notable fraction of homeowners who moved involuntarily due to, for example, foreclosure. Many involuntary moves appear to stem from a combination of negative home equity and adverse economic shocks rather than negative equity alone. Homeowners with both negative equity and economic shocks were substantially more likely to have moved between 2007 and 2009 and to have moved involuntarily. The findings suggest that, analogous to the double-trigger theory of default, the relationship between negative equity and household mobility varies with households’ exposure to adverse shocks.     

Antecedents of concession bargaining in the Great Recession: evidence from Ireland

Concession or ‘give back’ bargaining involves firms seeking changes in pay and conditions of employment from trade unions in return for pledges of enhanced job security and sometimes other forms of reciprocation. Several distinct modes of concession bargaining are distinguishable in the literature, and three modes of concession bargaining have been identified in Ireland during the Great Recession: integrative, distributive and minimal engagement. Deploying qualitatively informed quantitative data on the conduct of collective bargaining during the Great Recession, this article examines a series of antecedent influences on the choices firms make in conducting concession bargaining with unions.     

Centralization of strategic decisions during the Great Recession

We use a survey dataset of more than 14,000 manufacturing firms from seven European countries in order to examine changes in the degree of centralization that followed the Great Recession in 2009. We document three findings. First, we find that a larger fall in sales is associated with a tendency to centralize. The finding is consistent with a theoretical prediction that organizations facing substantial demand shocks are more likely to centralize. Second, we show that the change in the level of centralization during the crisis was accompanied by other decisions characteristic of short‐term optimization. Third, we show that increased centralization has led to slower postcrisis growth even when controlling for the size of the shock and other decisions taken during the crisis.     

Leverage Dynamics and the Burden of Debt

In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2017, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, including the lack of above-trend output growth during credit booms and the severity of ensuing recessions, without appealing to large shocks or nonlinearities. Estimating the model with data up to 2005, it predicts credit and expenditure paths that closely match actual developments before and during the Great Recession.     

Unemployment shocks and material deprivation in the European Union: A synthetic control approach

This paper analyzes how material deprivation responds to drastic changes in unemployment levels. We explore unemployment shocks registered in some European Union countries during the so-called Great Recession. To do so, we apply the synthetic control methodology, which has been rarely used in the field of distributive analyses. We use this approach to identify the impact of unemployment shocks on material deprivation and conduct different sensitivity analyses to test the results. We find that contrary to the traditional assumption of the low sensitivity of material deprivation measures to changes in the economic cycle, unemployment shocks have a significant and rapid impact on material deprivation. This conclusion holds even when extending the period of analysis, changing the indicator of material deprivation, or modifying the definition of unemployment shock.     

Great recession,slow recovery and muted fiscal policies in the US

This paper reconsiders the role of macroeconomic shocks and policies in determining the Great Recession and the subsequent recovery in the US. The Great Recession was mainly caused by a large demand shock and by the ZLB on the interest rate policy. In contrast with previous findings, the subsequent jobless recovery is explained by the ZLB effect. We estimate a fraction of Non-Ricardian households which is close to 50%, and obtain comparatively large fiscal multipliers. However we cannot detect a significant contribution of fiscal policies in stabilizing the US economy. For instance, the 2007–2009 large increase in expenditure-to-GDP ratios was apparently determined by the adverse non-policy shocks that caused the recession.     

Short-term inflation projections: A Bayesian vector autoregressive approach

In this paper we construct a large Bayesian Vector Autoregressive model (BVAR) for the Euro area that captures the complex dynamic inter-relationships between the main components of the Harmonized Index of Consumer Prices (HICP) and their determinants. The model generates accurate conditional and unconditional forecasts in real-time. We find a significant pass-through effect of oil-price shocks on core inflation and a strong Phillips curve during the Great Recession.     

Impact of the Great Recession on unemployed and NEET individuals’ labour market transitions in Ireland

The impact that the Great Recession has had on countries’ labour markets has been well documented. In Ireland, the contraction in economic activity that took place resulted in the country's overall unemployment rate increasing from 4.6% in 2006 to 15% in 2012. The country's youth unemployment rate rose from 9.9% to 33% over the same time period, while the proportion of NEETs increased from 10.1% in 2006 to 18.7% in 2012. Policymakers are aware of the unemployment rates of young and prime-aged people as well as the NEETs rate. However, little is known about these groups’ profiles, whether their profiles have changed since the recession and also their labour market transition patterns pre and post the Great Recession. Given the importance of this information in the design of effective activation measures to assist unemployed and NEET individuals, this paper examines each of these issues in turn. Overall, the study found for all three groups examined that the rate of transition to employment fell dramatically between 2006 and 2011. The analysis showed that the drop in the groups’ transition rates was not due to changes in the underlying sub-group population structures but to changes in the external environment that resulted in the impact of possessing certain characteristics changing over the recession. For example, education and nationality have become more important in finding a job in Ireland over the course of the recession, while there has been a fall in the scarring impact of unemployment durations.     

Measuring the natural rate of interest: A note on transitory shocks

We present evidence that the natural rate of interest is buffeted by both permanent and transitory shocks. We establish this result by estimating a benchmark model with Bayesian methods and loose priors on the unobserved drivers of the natural rate. When subject to transitory shocks, the median estimate for the US economy is more procyclical, displays a less marked secular decline, and is therefore higher following the Great Recession than most estimates in the literature.     

The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008-9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price-growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008‐9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price‐growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

Verifying the state of financing constraints: Evidence from U.S. business credit contracts

Many policymakers are concerned that tight financing constraints for small businesses are stalling the recovery from the Great Recession. This paper empirically assesses two agency problems that induce such financing constraints—one resulting in a “firm balance sheet channel” and one resulting in a “bank balance sheet channel”. Evaluating specific models of these two agency problems against a comprehensive data set of U.S. small business credit contracts, I find strong support for the firm balance sheet channel but only weak support for the bank balance sheet channel. A complementary regression analysis confirms this result. Hence, policies seeking to improve firms’ balance sheets may be desirable to support small business lending in the recovery from the Great Recession.     

On the Time-Varying Effects of Economic Policy Uncertainty on the US Economy

We study the impact of Economic Policy Uncertainty (EPU) on the US Economy by using a VAR with time-varying coefficients. The coefficients are allowed to evolve gradually over time which allows us to discover structural changes without imposing them a priori. We find three different regimes, which match the three major periods of the US economy, namely the Great Inflation, the Great Moderation and the Great Recession. The initial impact on real GDP ranges between −0.2% for the Great Inflation and Great Recession and −0.15% for the Great Moderation. In addition, the adverse effects of EPU are more persistent during the Great Recession providing an explanation for the slow recovery. This regime dependence is unique for EPU as the macroeconomic consequences of Financial Uncertainty turn out to be rather time invariant.     

Global financial uncertainty

We estimate a novel measure of global financial uncertainty (GFU) with a dynamic factor framework that jointly models global, regional, and country-specific factors. We quantify the impact of GFU shocks on global output with a VAR analysis that achieves set identification via a combination of narrative, sign, ratio, and correlation restrictions. We find that the contraction in world output during the Great Recession would have been 13% milder in absence of GFU shocks. We also find support for a global finance uncertainty multiplier: the more global financial conditions deteriorate after a GFU shock, the larger the world output contraction is.     

Can strategic flexibility help firms profit from product innovation?

Although it is generally acknowledged that product innovation is critical for firms to sustain their competitive advantages, innovating firms sometimes fail to obtain economic returns from product innovation. This study focuses on the moderating effect of strategic flexibility (composed of resource flexibility and coordination flexibility) on the relationship between product innovation and firm performance, in order to address an important but previously unexplored question: Can strategic flexibility help firms profit from product innovation? Our empirical test, utilizing a sample of 607 Chinese firms, reveals that the moderating effect of resource flexibility on the positive relationship between product innovation and firm performance is negative, while that of coordination flexibility is positive. Further, such moderating effects are especially likely to be profound for firms confronting a high level of competitive intensity. We conclude by discussing our contributions, the implications, and possible future extensions.     

The Great Depression versus the Great Recession in the U.S.: How fiscal,monetary, and financial polices compare

This study reviews the financial distress that triggered and amplified the financial crises of the Great Depression and Great Recession and compares macroeconomic and financial policy responses. Shadow banking funded the build-up of the financial excesses that preceded both. The quicker and forceful response of monetary and fiscal policy during the Great Recession and stronger action to restore market functionality mitigated the downturn and aided recovery. Nevertheless, actions to address the mortgage debt overhang were slower. Post-Depression reforms focused on preventing deposit runs and post-Great Recession reforms on preventing runs on bank debt and shadow banks while boosting capital buffers.     

Open business models in entrepreneurial stages: evidence from young Spanish firms during expansionary and recessionary periods

This study examines the effect of open business models on the innovation performance of young firms during expansionary and recessionary periods. Founded on previous studies regarding innovation and business models, evidence shows that open business models developed by young firms will increase their innovation performance independently of economic conditions. Moreover, the theoretical effect of different types of collaborations (science-based, commercial, and diverse collaborations) adopted by young firms could differ during diverse economic periods. We tested this theoretical development using a Tobit analysis with firm level data collected from the Spanish Technological Innovation Panel (PITEC). The total number of observations corresponds to 318 young Spanish firms in 2005 (expansionary period) that remained active in 2011 (recessionary period). Our results indicate that in expansionary periods, young Spanish firms benefit from open business models oriented toward diverse types of cooperation (even though commercial collaboration harms innovation performance), whereas in recessionary periods, commercial and diverse technological collaborations encourage young Spanish firms to exploit innovation benefits.