Oil prices,economic activity and inflation: evidence for some Asian countries

In this paper we study the oil prices–macroeconomy relationship by means of studying the impact of oil price shocks on both economic activity and consumer price indexes for six Asian countries over the period 1975Q1–2002Q2. The results suggest that oil prices have a significant effect on both economic activity and price indexes, although the impact is limited to the short run and more significant when oil price shocks are defined in local currencies. Moreover, we find evidence of asymmetries in the oil prices–macroeconomy relationship for some of the Asian countries.     

The nonlinear effect of oil price shocks on financial stress: Evidence from China

This paper examines the nonlinear effects of different types of oil price shocks on China’s financial stress index (FSI). For this purpose, we use newly proposed framework by Ready (2018) to decompose oil prices into supply, demand and risk shocks. Then, we use a Markov regime-switching (MRS) model to investigate the nonlinear effects of these oil price shocks on China’s FSI. The empirical results show that the effects of three oil price shocks are nonlinear under different regimes. In particular, oil supply shocks mainly have a significantly positive effect on China’s FSI in the low-volatility state; demand shocks have negative effects on China’s FSI in different regimes, but this effect is larger in the low-volatility state; the effect of risk shocks on China’s FSI is the opposite, and it is positive in the high-volatility state but negative in the low-volatility state.     

Speculation in the Oil Market

The run‐up in oil prices since 2004 coincided with growing investment in commodity markets and increased price co‐movement among different commodities. We assess whether speculation in the oil market played a role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a dynamic factor model. This method is motivated by the fact that a small‐scale vector autoregression is not informationally sufficient to identify the shocks. The main results are as follows. (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. (iii) The co‐movement between oil prices and the prices of other commodities is mainly explained by global demand shocks. Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role. Copyright © 2014 John Wiley & Sons, Ltd.     

Oil price shocks and unemployment in Central and Eastern Europe

The aim of this paper is to examine the effect of oil price movements on unemployment in Central and Eastern Europe. We do this by disentangling oil prices movements by their sign and from there we analyse the separate effects of positive and negative movements of oil prices on unemployment rates. We find that, although oil prices and unemployment are not correlated very much in the short run, the effect of oil price shocks on the natural rate of unemployment goes in the same direction, so that increases or decreases in oil prices increase or decrease the natural rate of unemployment.     

International spillovers of (un)conventional monetary policy: The effect of the ECB and the US Fed on non-euro EU countries

We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and the US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have a greater effect than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.     

Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states

This study presents evidence on the effect of domestic and Euro Area monetary policy on stock prices in four new EU member states of Central Europe and the main determinants of stock price volatility, estimating structural vector autoregressive models identified with short-run restrictions. We find that stock prices in the considered new EU member states are more sensitive to changes in the Euro Area interest rate than to the domestic one. Moreover, the bulk of stock price volatility in these countries is due to shocks related to exchange rate and Euro Area monetary policy. Overall, we find that local stock markets are more sensitive to external shocks than to domestic ones.     

Price effects of steel commodities on worldwide stock market returns

We analyze the price effects of steel commodities on stock market returns in emerging and developed economies. These commodities have recently attained increased media exposure due to the rise in the U.S. steel import tariffs, which pose the threat of reducing global demand for steel products and, consequently, lowering prices abroad. However, little has been investigated on the impact of steel commodity prices on worldwide stock market returns. By performing structural VAR and GARCH techniques on a weekly-frequency time series from 2002 to 2015, we find positive and statistically significant effects of linear and non-linear steel commodity price shocks on real stock returns in the commodity markets. In the highly diversified financial markets such as U.S. and Germany, real stock returns do not significantly respond to steel commodity price shocks, although we find highly significant positive responses from developed economies such as Australia, Japan and South Korea. Results are robust to different model specifications. Our evidence suggests that higher tariffs on steel imports represent a larger disadvantage to commodity markets which are more largely impacted by steel commodity prices. We provide economic policy implications based on recent literature.     

Self-reinforcing effects between housing prices and credit

The financial crisis has brought the interaction between housing prices and household borrowing into the limelight of the economic policy debate. This paper examines the nexus of housing prices and credit in Norway within a structural vector equilibrium correction model (SVECM) over the period 1986q2–2008q4. The results establish a two way interaction in the long-run, so that higher housing prices lead to a credit expansion, which in turn puts an upward pressure on prices. Interest rates influence housing prices indirectly through the credit channel. Furthermore, households’ expectations about the future development of their own income as well as in the Norwegian economy have a significant impact on housing price growth. Dynamic simulations show how shocks are propagated and amplified. When we augment the model to include the supply side of the housing market, these effects are dampened.     

Coping with oil price shocks - the case of Japan

The world economy has now suffered two major oil price shocks. Although the percentage increase in 1973-74 (OPEC I) was much larger than in 1979-80 (OPEC II). the potential effect on the level of world prices - and hence on the real economy - was about the same in each case. One lesson that was learned from OPEC I was that the impact of the oil price increase on individual economies depended on the policies followed by each country. For example, in the UK the inflation rate rose to 27 per cent in 1975 whereas in West Germany - which was just as dependent on imported oil - inflation rose to 7 per cent. In this Economic Viewpoint we consider the example of one country - Japan - which changed its policies between the two events. As a result it changed from being one of the least successful to being one of the most successful in coping with the oil price increase.     

The effects of oil price shocks on job reallocation

We investigate the effect of oil price innovations on U.S. manufacturing job flows using a simultaneous equation model that nests symmetric and asymmetric responses. We find no evidence of asymmetry in the response of job flows to positive and negative oil price innovations. We then inquire whether firms, when facing positive shocks, shed jobs faster than they create jobs. We show that positive innovations lead to a decline in net employment and an increase in job reallocation, possibly due to search and matching issues. Yet, the latter effect becomes statistically insignificant when we control for data mining. We demonstrate that the cumulative one-year effect of oil price shocks on job creation and destruction was smaller during the Great Moderation, but it was larger for gross job reallocation. These variations were caused by a change in the transmission channel and not by smaller oil price shocks.     

Risk shocks and housing supply: A quantitative analysis

This paper analyzes the role of stochastic uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production and provide estimates of the time-series properties of risk shocks by using firm level productivity data. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for understanding housing price movements. Specifically, the model can match the volatility of housing prices observed in the data. It is also demonstrated that adjustment costs are important in replicating the contemporaneous correlation of housing prices with GDP and residential investment. Critically, bankruptcy costs act as an endogenous markup factor in housing prices and are an important determinant of house price volatility. However, in comparison to housing demand shocks, risk shocks have low explanatory power for real quantities.     

Monetary policy,housing rents,and inflation dynamics

In this paper we study the effect of monetary policy shocks on housing rents. Our main finding is that, in contrast to house prices, housing rents increase in response to contractionary monetary policy shocks. We also find that, after a contractionary monetary policy shock, rental vacancies and the homeownership rate decline. This combination of results suggests that monetary policy may affect housing tenure decisions (own versus rent). In addition, we show that, with the exception of the shelter component, all other main components of the consumer price index (CPI) either decline in response to a contractionary monetary policy shock or are not responsive. These findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component. We find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation, such as the CPI and the price index for personal consumption expenditures, but have higher standard deviations and react more to monetary policy shocks. Finally, we show that the response of housing rents accounts for a large proportion of the “price puzzle” found in the literature.     

Commodity house prices

This paper studies how commodity price movements have affected the local house prices in commodity-dependent economies, Australia and New Zealand. We build a geographically hierarchical empirical model and find that the commodity prices influence local house prices directly and also indirectly through macroeconomic variables. The impacts of commodity price changes are analogous to “income shocks” rather than “cost shocks”. Regional heterogeneity is also observed in terms of differential dynamic responses of local house prices to energy versus non-energy commodity price movements. The results are robust to alternative approaches. Directions for future research are also discussed.     

Macroeconomic Effects of Precautionary Demand for Oil

We evaluate the macroeconomic effects of shocks specific to the oil market, which mainly reflect fluctuations in precautionary demand for oil driven by uncertainty about future supplies. A two‐stage identification procedure is used. First, daily changes in the futures–spot price spread proxy for precautionary demand shocks and the path of oil prices is estimated. This information is then exploited to restrict the oil price response in a vector autoregression. Impulse responses suggest that such shocks reduce output and raise prices. Historical decomposition shows that they contributed significantly to the US recessions in the 1990s and in the early 2000s, but not to the most recent slump. Copyright © 2014 John Wiley & Sons, Ltd.     

Housing wealth,liquidity constraints and self-employment

This paper investigates the existence of liquidity constraints facing entrepreneurs in the United Kingdom. Using a household-level panel data set, entry to self-employment is shown to be a function of household net worth. We use inheritances and unanticipated movements in house prices as instruments for shocks to liquidity. Results indicate that inheritances are a poor instrument for liquidity constraints because both past and future inheritances predict entry to self-employment. House prices shocks are a more plausible instrument because self-employed households disproportionately re-mortgage, but our results again indicate little evidence of house price shocks unbinding liquidity constraints facing the would-be self-employed.     

Monetary policy for rationally inattentive economies with staggered price setting

The paper examines the optimal monetary policy when firms are constrained by information processing capability and infrequent price adjustments. Firms' information processing limit gives rise to imperfect knowledge about macroeconomic aggregates and endogenous information learning contingent on the monetary policy. Staggered price setting introduces the observed price duration and additional policy tradeoffs resulting from the interactions between nominal rigidities and imperfect information processing. The integrated model implies an optimal policy that commits to complete price stabilization in response to natural rate shocks but not in response to markup shocks. In the presence of markup shocks, it is optimal for the central bank to focus on price stabilization in the initial periods following markup shocks and shifts the emphasis to output gap stabilization later. Moreover, larger information capacity, stronger complementarities and more persistent shocks require more aggressive price stabilization in the short-run.     

Dynamic competition with consumer inertia

We study a framework where two duopolists compete repeatedly in prices and where chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. High discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome. Moreover, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.     

Oil prices,stock returns,and exchange rates: Empirical evidence from China and the United States

Employing the diagonal BEKK model as well as the dynamic impulse response functions, this study investigates the time-varying trilateral relationships among real oil prices, exchange rate changes, and stock market returns in China and the U.S. from February 1991 to December 2015. We highlight several key observations: (i) oil prices respond positively and significantly to aggregate demand shocks; (ii) positive oil supply shocks adversely and significantly affect the Chinese stock market; (iii) oil price shocks persistently and significantly impact the trade-weighted US dollar index negatively; (iv) the US and China stock markets correlate positively just as the dollar index and the exchange rate does; (v) a significant parallel inverse relation exists between the US stock market and the dollar and between the China stock market and the exchange rate; and (vi) the Chinese stock market is more volatile and responsive to aggregate demand and oil price shocks than the US stock market in recent years.     

News shocks and asset price volatility in general equilibrium

We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.     

Price and interest rate dynamics induced by multiperiod contracts

This paper suggests a mechanism by which nominal price rigidities can create a transmission mechanism for monetary shocks through relative price distortions in an economy with both spot and contract markets. The globally unique equilibrium time path of interest rates and prices following an impulse shock to the money supply is characterized. The model predicts that prices and interest rates cycle around the new steady state, with real interest rates initially falling and prices overshooting in the case of a positive shock. The volatility of spot prices and interest rates exceeds that of contract prices.