The contemporaneous correlation between price shocks and output shocks

Until the 1990s, prices were believed to be procyclical. Several researchers have since presented evidence of counter-cyclical prices. This evidence proved robust, but its interpretation has varied. Some have argued that the contemporaneous correlation between output and prices reflects both the source of the current shock and the adjustment process from short-run to long-run equilibrium; the adjustment to the long run imparts a bias towards a negative price-output correlation. The issue of dynamics is addressed by estimating price shocks and output shocks. The sign of the correlation between these shocks does not reveal anything about the relative importance or frequency of demand versus supply shocks; however, some understanding is gained from the time-series of the product of the shocks. In periods when the product is negative, supply shocks must have been either relatively large or relatively important. In periods when the product is positive, demand shocks must have been either relatively large or relatively important. The data suggest that the economies of the USA, Canada and the UK were buffeted by both demand and supply shocks in about equal portions.     

Monetary Rules:A Preliminary Analysis*

This paper examines the effects of three simple rules for monetary policy in an econometric model of the Australian economy. Its main contribution is to examine such rules under a range of exogenous shocks to the economy. rather than over a particular historical episode. A second contribution is to show that, in the model used, the money supply may be controlled by variations in interest rates under official control. However. lags of two to four quarters are involved for the shocks considered in the paper. The results are consistent, in the short run, with those obtained by Poole—that is, it is sensible to fix the money supply when the shocks are ‘real’ and to fix the interest rate when the shocks are ‘financial’. In the medium to long run. however, it is shown that the variability of inflation and unemployment may be less when money is controlled even for a financial shock. These conclusions are strengthened if allowance is made for the ‘underwriting’ problem.     

Demand Shift across US Industries and the Stabilizing Function of Nominal Wage and Price Flexibility.

Nominal wage and price adjustments in response to demand shocks are likely to determine industrial output variability. The direction of this relationship is complicated, however, by demand and supply factors. The empirical investigation across a sample of private industries in the United States produces the following evidence. Price flexibility moderates the response of the output supplied to a given shift in industrial demand. Similarly, nominal wage flexibility moderates, although insignificantly, the output response to a given shift in industrial demand. The size of industrial demand shifts dominates, however, supply-side constraints in differentiating output fluctuations across industries. While price flexibility moderates shifts in industrial demand in response to aggregate demand shocks, these shifts are larger the higher the nominal wage flexibility across industries. The combined supply and demand effects differentiate the stabilizing function of nominal wage and price flexibility. Nominal wage flexibility increases output fluctuations in response to aggregate demand shocks. In contrast, output fluctuations are smaller the larger the price adjustment to demand shocks across industries. Given the endogeneity of price flexibility, it is necessary to control for variation in demand variability in order to reveal the stabilizing effect of price flexibility on output across industries.     

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.     

Nominal inertia and shock persistence in UK business cycles

A structural VAR methodology is used for UK data to identify and map out the effects of innovations in the money supply, employment, output, wages and prices. Moreover, bands of two standard errors are computed for the impulse response functions so that comment may be made on the significance of the dynamic responses of the variables to the simulated shocks. This allows conclusions to be drawn on the persistence of shocks. Results suggest that output variation is largely determined by aggregate demand shocks over the business cycle frequency. Importantly, evidence is also found of rigidities in the form of price inertia and nominal wage stickiness.     

Shocks and rigidities as determinants of CEE labour markets’ performance

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long‐run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short‐to‐medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.     

On the relative importance of demand and supply shocks: a panel VAR study for US states

This article is a panel VAR study of demand and supply shocks in the USA using state-level data where structural shocks are decomposed into state idiosyncratic and common components. Decomposition suggests that in all instances, idiosyncratic state shocks rather than common shocks have larger impact and explain most variation in both the state-level unemployment rate and real gross state product. Further, demand shocks are the primary driving force in unemployment rate fluctuations, while both demand and supply are important in output movements to varying degree of impact and importance depending on the use of quarterly or annual data.     

A New Keynesian SVAR model of the Australian economy

We estimate an SVAR model for the Australian economy based on an open economy New Keynesian model that accounts for the forward-looking behaviour exhibited by economic agents. Deep structural parameters are identified by placing exclusion restrictions on the VAR residuals and the covariance matrix. Dynamic responses show no price and exchange rate puzzles and indicate that the Reserve Bank of Australia (RBA) stabilises output fluctuations in the short run while maintaining a medium-run inflation target since 1984. Aggregate demand shocks are found to be driven by external demands. The RBA exercises caution in responding to aggregate supply shocks.     

中国改革历程中的产出和价格波动:货币所扮演的角色

中国经济正在其改革历程中经历着经济增长和通货膨胀的周期性波动.关于货币在这些波动中所起的作用,经济学家有着不同的观点.该文运用基于交易方程式的结构化 VEC 模型,对这些观点进行了探讨.我们发现,在长期,货币对产出和价格的变化做出适应性调整,而并非这些变化的原因.而在短期,价格变动要归因于那些对货币和价格有持久影响而对真实产出没有持久影响的冲击.这些冲击对多数的货币波动负责,并且强烈地影响产出.     

THE IMPACT OF OIL PRICE SHOCKS ON THE U.S. STOCK MARKET*

It is shown that the reaction of U.S. real stock returns to an oil price shock differs greatly depending on whether the change in the price of oil is driven by demand or supply shocks in the oil market. The demand and supply shocks driving the global crude oil market jointly account for 22% of the long‐run variation in U.S. real stock returns. The responses of industry‐specific U.S. stock returns to demand and supply shocks in the crude oil market are consistent with accounts of the transmission of oil price shocks that emphasize the reduction in domestic final demand.     

Are we ignoring supply shocks? A proposal for monitoring cyclical fluctuations

Although there are several mechanisms within theoretical models acknowledging that supply shocks can account for an important part of output fluctuations, even in the short-run, policy practitioners continue endorsing the idea that only demand shocks explain them. This article provides empirical evidence on several Latin American countries and the USA to show that the share of output variance explained by supply shocks in the short-run is substantial. It also offers a more agnostic implementation of the Blanchard–Quah type of structural analysis that focuses on policy evaluation. For this purpose, we propose constructing two indicators out of the historical decomposition of shocks: the goods market unbalance (GMU) and the total cyclical fluctuations (TCF). While GMU is an excess demand measurement that reveals the scope of the distortions caused by shocks, TCF, combined with GMU, helps to understand what type of shock is predominantly explaining (output and inflation) fluctuations. These two pieces of information provide a very different diagnosis than traditional output gaps and should guide monetary policy interventions more adequately. The agnosticism of this proposal has two aspects: the use of a different identification strategy and the assessment of the effects of both supply and demand shocks on output.

     

Oil Prices, Terms of Trade Shocks, and Macroeconomic Fluctuations in Saudi Arabia

The article investigates the sources of macroeconomic fluctuations in Saudi Arabia using structural vector autoregression methods and pays particular attention to oil prices and changes in terms of trade. Using a macroeconomic model tailored to the Saudi Arabian economy, the authors identify terms of trade, supply, balance of payments, aggregate demand, and monetary shocks. The results show that the Saudi Arabian price level, real exchange rate, and to a lesser extent output is vulnerable to terms of trade shocks. Moreover, Saudi Arabian terms of trade are driven by output, trade balance, and aggregate demand shocks. To stabilize output and the real exchange rate, Saudi Arabia ought to continue diversifying its production base and aim for a stable nominal oil price. (JEL E32 , Q43 , C22 )     

Identifying Long Run Supply Curve of India

Identifications of a vertical then a horizontal supply curve are successively imposed on Indian time series inflation and industrial output growth data in a two-equation Structural Vector Autoregression (SVAR) model. The results provide an indirect test of the identifications. A high elasticity of long run supply cannot be ruled out, because supply shocks have a large impact on inflation and demand has a large and persistent effect on output levels. But supply is subject to frequent shocks. Estimated structural shocks, capture historical recessions and turning points well. Pro-cyclical policy induced demand shocks aggravated negative supply shocks or failed to take full advantage of positive supply side developments.

     

Oil prices and economic downturns: the case of Spain

We address the macroeconomic effects of an oil price shock in Spain. We apply a vector autoregression model (VAR) analysis to quarterly data for the Spanish economy since 1986, to elucidate the effects of variations in the oil price on the economy, considering the three main causes of disruptions in the oil markets: oil supply shocks, oil demand shocks and oil-specific (precautionary) demand shocks. We conclude that the effects in Spain strongly depend on the type of shock: the consumer price index (CPI) has mainly been influenced by oil demand shocks; output has only reacted to oil supply shocks; and monetary policy has mainly reacted after precautionary shocks. Second-round effects caused by the behaviour of nominal wages have not been found. Additionally, we discuss two facts: the ability of firms to increase markups in a context of rising demand and the procyclical role of monetary policy when faced with oil demand shocks.     

中国改革历程中的产出和价格波动：货币所扮演的角色

中国经济正在其改革历程中经历着经济增长和通货膨胀的周期性波动。关于货币在这些波动中所起的作用，经济学家有着不同的观点。本文运用基于交易方程式的结构化VEC模型，对这些观点进行了探讨。我们发现，在长期，货币对产出和价格的变化做出适应性调整，而并非这些变化的原因。而在短期，价格变动要93因于那些对货币和价格有持久影响而对真实产出没有持久影响的冲击。这些冲击对多数的货币波动负责，并且强烈地影响产出。     

Money,output and income velocity

This paper attempts to assess empirically the contribution of three structural shocks – monetary, institutional (financial and fiscal), and technological – to output and velocity fluctuations in the national bank era and the post-1973 period. To identify these shocks we impose only long–run restrictions, derived from a monetary growth model. We find that higher money growth increases (decreases) velocity in the first (second) period, depending crucially on the resulting changes in the transactions frequency. Credit–enhancing financial or expansionary fiscal shocks have a permanent positive effect on velocity and a himp–shaped effect on output, whereas technological shocks cause velocity to decrease in the short run and output to move to a permanently higher level.     

Effects of mineral-commodity price shocks on monetary policy in developed countries

This article investigates effects of changes in mineral commodity prices on monetary policy. Using macroeconomic data from three mineral-producing countries (Australia, Canada and New Zealand) and two non-mineral-resource countries (USA and UK), I estimate the impulse response functions of the policy interest rates and the core consumer price index (CPI) inflation rates to mineral-commodity price shocks. I find that the central banks in both groups of the examined countries significantly respond to mineral-commodity price shocks. In responses to an unexpected 10% increase in mineral commodity prices, the central banks are estimated to increase their policy interest rates by approximately 0.8 percentage points. Moreover, the central banks seem to take anticipatory policy reactions to control core CPI variations triggered by these shocks. Thus, mineral commodity prices would act as important determinants of the monetary policies in both groups of the examined countries. These findings would be useful for analysing Taylor rules in their countries. However, effects of the increase in their policy interest rates on core CPI inflation cannot be identified for the examined countries.     

OUTPUT–EMPLOYMENT RELATIONSHIP ACROSS SECTORS: A LONG‐ VERSUS SHORT‐RUN PERSPECTIVE

This paper investigates the nature of the output–employment relationship by using the Turkish quarterly data for the period 1988–2008. Even if we fail to find a long‐run relationship between aggregate output and total employment, there are long‐run relationships for the aggregate output with non‐agricultural employment and sectoral employment levels for seven of nine sectors that we consider. However, a further investigation for the output and employment relationship within a short‐run perspective does not reveal statistically significant relationships for either total employment or non‐agriculture employment, or eight of the nine sectors that we consider. Although there are various long‐run relationships between output and employment, the short‐run links between demand and employment are weak. The various implications of this for the economy and the labour market are discussed. As a result, maintaining high levels of output in the long‐run creating demand is essential for employment generation.     

总需求和总供给冲击对我国失业和产出动态关系的影响分析

在我国的失业产出关系中,短期内,总供给冲击是产出波动的主要来源,总需求冲击则是失业波动的主要来源,总需求冲击和总供给冲击共同破坏了产出失业之间反向变化关系,但是总需求冲击的破坏作用更多一些。在长期,总需求冲击对产出没有影响,总供给冲击对产出有显著的正的影响,总需求冲击在长期对失业没有影响,但总供给冲击在长期会对失业产生不利影响,即正的供给冲击的累积影响所带来的产出增加在长期使我国的失业率上升。     

Price stickiness, trend inflation, and output dynamics: a cross‐country analysis

Abstract.  Sticky price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low‐trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country‐specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while price stickiness is important for understanding short‐run impact effects, real propagation mechanisms may drive persistence in output fluctuations.