Crude oil price dynamics with crash risk under fundamental shocks

Our paper presents a crude oil price model in which the price is confined in a wide moving band. A price crash occurs when the price breaches the lower boundary where a smooth-pasting condition is imposed. Using an asymmetric mean-reverting fundamental (supply/demand) shock, the solution derived from the oil price equation for the model shows the oil price follows a mean-reverting square-root process, which is quasi-bounded at the boundary. The oil price dynamics generates left-skewed price distributions consistent with empirical observations. A weakened mean-reverting force for the price increases the probability leakage for the price across the boundary and the risk of a price crash. The empirical results show the oil price dynamics can be calibrated according to the model, where the mean reversion of the price dynamics is positively co-integrated with the oil production reaction to negative demand shocks, and with the risk reversals of the commodity currencies, the Canadian dollar and the Australian dollar in currency option markets. The results are consistent with an increased price crash risk with negative demand shocks and negative risk reversals. The forecasting performance of the oil price model is better than the futures-spread models and random walk models during the crash periods. While the price of oil was above the lower boundary for most of the time, the conditions for breaching the boundary were met in 2008 and 2014 when the price fell sharply.     

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.     

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.     

Macroeconomic responses of emerging market economies to oil price shocks: An analysis by region and resource profile

We analyze the impact of oil price shocks on the macroeconomic fundamentals in emerging economies in three regions that have different resource endowments. The existing literature on emerging economies remains inconclusive on how regional factors and resource characteristics affect the response of macroeconomic variables to oil price shocks. We show that (1) exports in Europe and Central Asia are driven by oil more than East Asia and the Pacific and that (2) policy makers in East Asia and the Pacific should be concerned about real exchange appreciation following a positive oil shock to mitigate losses in the non-oil export market. Analysis by resource endowment further reveals that, in less-resource-intensive economies, an oil price shock causes large variations in consumption and has a negative and persistent impact on the real gross domestic product (GDP). In mineral-exporting economies, real GDP and interest rates are driven largely by oil price shocks. The response of real GDP in mineral-exporting economies is short lived. In oil-exporting economies, only real GDP has a large variation in response to oil price shocks. Our findings highlight the need for customized policy responses to oil price shocks, depending on resource endowments, as we show that a “one size fits all" policy does not exist.     

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.     

The time varying effect of oil price shocks on euro-area exports

In this paper we provide novel evidence on changes in the relationship between the real price of oil and real exports in the euro area. By combining robust predictions on the sign of the impulse responses obtained from a theoretical model with restrictions on the slope of the oil demand and oil supply curves, we identify oil supply and foreign productivity shocks in a time varying VAR with stochastic volatility. We find that from the 1980s onwards the relationship between oil prices and euro area exports has become less negative conditional on oil supply shortfalls and more positive conditional on foreign productivity shocks. Using the theoretical model we show that our empirical findings can be accounted for by (i) stronger trade relationship between the euro area and emerging economies (ii) a decrease in the share of oil in production and (iii) increased competitive pressures in the product market.     

House price synchronization across the US states: The role of structural oil shocks

This paper analyzes the impact of disentangled oil shocks on the synchronization in housing price movements across all the US states plus DC. Using a Bayesian dynamic factor model, the house price movements are decomposed into national, regional, and state-specific factors. We then study the impact of oil-specific supply and demand, inventory accumulation, and global demand shocks on the national factor using linear and nonlinear local projection methods. The impulse response analyses suggest that oil-specific supply and consumption demand shocks are most important in driving the national factor. Moreover, as observed from the regime-specific local projection model, these two shocks are found to have a relatively stronger impact in a bearish rather than a bullish national housing market. Our results have important policy implications.     

The macroeconomic effects of uncertainty shocks: The role of the financial channel

This paper studies the macroeconomic effects of uncertainty shocks with an emphasis on the interaction between elevated uncertainty and credit market conditions when the economy is in different regimes (recessions vs. non-recessions). We use a smooth-transition factor-augmented vector autoregression (ST-FAVAR) and a large monthly panel of U.S. macroeconomic and financial indicators in our estimation. Our findings are twofold. First, while an unanticipated increase in uncertainty has adverse effects on the real economy and financial markets, the effects are quantitatively larger during recessions. Second, the financial channel is important in the transmission of uncertainty shocks, with a greater role during recessions and in the short run.     

Institutional determinants of the effective tax rate in G7 and BRIC countries

This paper studies the relationship between the corporate effective tax rate (ETR) and several institutional factors in the G7 and the BRIC countries (Brazil, Russia, India, and China). We use the panel data methodology with a data sample of 25,878 listed firms in 2010–2018. The results show that all the variables analyzed have an effect on the ETR. Some—such as the statutory tax rate, government effectiveness, regulatory quality, rule of law, and open markets—affect all countries, whereas others, such as corruption control and economic freedom, affect only the BRIC countries, and gross domestic product growth, the deficit, and gross debt only affect the G7 countries.     

News on inflation and the epidemiology of inflation expectations in China

Inflation expectations are important elements in monetary policy analysis. This paper examines how inflation expectations of Chinese consumers and professional forecasters are affected by media sentiments based on the epidemiological foundations of the sticky information model. Rather than assuming professional forecasts are identical to newspaper forecasts, we assume news media are a common source for the transmission of typical people's inflation expectations. We collect media data from 30 leading newspapers and magazines in China and code news reports into three types of inflation: rising, falling, and unchanged. More importantly, we categorize the media pool into comprehensive, economic, and politically oriented media sources. We find a fundamental connection between news media and inflation expectations. However, there are significantly different impacts of news reports in different media sources on expectations. The difference is mainly concentrated in politically oriented media sources, and may be a reflection of China's unique media administration system.     

The dynamic impact of oil price shocks on the stock market and the USD/RMB exchange rate: Evidence from implied volatility indices

Using daily data from March 16, 2011, to September 9, 2019, we explore the dynamic impact of the oil implied volatility index (OVX) changes on the Chinese stock implied volatility index (VXFXI) changes and on the USD/RMB exchange rate implied volatility index (USDCNYV1M) changes. Through a TVP-VAR model, we analyse the time-varying uncertainty transmission effects across the three markets, measured by the changes in implied volatility indices. The empirical results show that the OVX changes are the dominant factor, which has a positive impact on the USDCNYV1M changes and the VXFXI changes during periods of important political and economic events. Moreover, USDCNYV1M changes are the key factor affecting the impact of OVX changes on VXFXI changes. When the oil crisis, exchange rate reform, and stock market crash occurred during 2014–2016, the positive effects of uncertainty transmission among the oil market, the Chinese stock market, and the bilateral exchange rate are significantly strengthened. Finally, we find that the positive effects are significant in the short term but diminish over time.     

The international transmission channels of US supply and demand shocks: Evidence from a non-stationary dynamic factor model for the G7 countries

We employ a multi-country non-stationary dynamic factor model to assess spillover effects and transmission channels of US supply and demand shocks on a variety of macroeconomic variables in individual non-US G7 countries. We find that trade, financial and confidence channels all play a significant role in the international transmission of US shocks. However, the results point to substantial heterogeneities of shock transmission across the individual G7 economies. In particular, we find negative transmission effects for Italy and Japan as the only two G7 countries not well integrated into global value chains. Moreover, the exchange rate responses of Germany, France and Italy turn out to be far less pronounced in comparison to the other G7 economies which we relate to their membership of the euro area and their coordinated monetary policies prior to the establishment of the euro. Whereas we document a close comovement of stock market dynamics across the G7 countries, we find credit and real estate markets to be less synchronized. We do not find the effects and transmission channels to be fundamentally affected by the post-2008 economic environment.     

Context effects in inflation surveys: The influence of additional information and prior questions

Context effects are known to affect responses to surveys. We report effects of information and task contexts in surveys of inflation expectations. Information context refers to contextual information about earlier inflation rates or other economic indicators. Task context refers to judgement tasks performed prior to the inflation judgement task under consideration. In three experiments, we show that contextual information improves judgement accuracy. As this information is given in expert, but not in lay surveys, its provision may partly explain why expert judgements are superior to those of lay people. In both expert and lay surveys, respondents make inflation judgements in the context of already having made other inflation judgements. We show that when different groups of people make inflation judgements either for the current or for the upcoming year, their judgements do not differ. However, when the same people make judgements for both the current and the upcoming years, the latter are significantly higher than the former, perhaps because people expect inflation to increase over time.     

Visiting the effects of oil price shocks on exchange rates: Quantile-on-quantile and causality-in-quantiles approaches

We employ the relatively novel quantile-on-quantile and causality-in-quantiles approaches to empirically address the effects of oil price shocks on exchange rates of developed and developing countries. We find the evidence of the effects of oil shocks on exchange rates vary across quantiles. In addition, the effects and causality of oil price shocks are asymmetric and the slope of the coefficient in quantile-on-quantile analysis shows a relatively extreme fluctuation. Furthermore, for the developed currencies, the Granger causal relationship in both the mean and the variance running from oil shocks to exchange rates is always evident at all quantiles, while for the developing countries, the causal flow in the first and second moments is insignificant at middle quantiles.     

Money demand and the role of monetary indicators in forecasting euro area inflation

This paper examines the stability of money demand and the forecasting performances of a broad monetary aggregate (M3), excess liquidity and excess inflation in predicting euro area inflation. The out-of sample forecasting performances are compared to a widely used alternative, the spread of interest rates. The results indicate that the evolution of M3 is still in line with money demand, even when observations from the economic and financial crisis are included. Both excess measures and the spread are useful for predicting inflation.     

The financial content of inflation risks in the euro area

Recent studies have emphasized that survey-based inflation risk measures are informative about future inflation, and thus are useful for monetary authorities. However, these data are typically only available at a quarterly frequency, whereas monetary policy decisions require a more frequent monitoring of such risks. Using the ECB Survey of Professional Forecasters, we show that high-frequency financial market data have predictive power for the low-frequency survey-based inflation risk indicators observed at the end of a quarter. We rely on MIDAS regressions for handling the problem of mixing data with different frequencies that such an analysis implies. We also illustrate that upside and downside risks react differently to financial indicators.     

Addressing the growth failure of the oil economies: The role of financial development

The oil exporting countries have experienced a relatively continuous fall in GDP per capita over the last 30 years. This is in spite of benefiting from a more than average of the rest of the world investment rate. The findings of this paper, report a lower level of financial development for the oil economies when compared with the rest of the world. We will show in this paper that the higher rate of investment of the oil economies can be explained mainly by the oil revenues and surprisingly, financial development has a net dampening effect on investment for these economies. The paper also shows that the weakness of financial institutions, contributes to the poor performance of economic growth of the oil economies and the weakness of financial institutions might be associated with the dominant role of government in total investment and the weakness of private sector.     

Spillover and connectedness among G7 real estate investment trusts: The effects of investor sentiment and global factors

This paper examines the dynamic spillover interconnectedness of G7 Real Estate Investment Trusts (REITs) markets. We use the spillover index of Diebold and Yilmaz (2012), the time-varying parameters vector-autoregression (TVP-VAR) model, and the quantile regression approach. The result show that REITs network connectedness is dynamic and experiences an abrupt increase in the first wave of COVID-19 outbreak (2020Q1). We also observe a substantial abrupt decrease in connectedness during the success of vaccination programs (end 2021). The connectedness among assets is much stronger during COVID-19 than before. The REITs of Japan and Italy are net receivers of spillover and those of US and UK are net transmitters of spillovers before and during COVID-19. Conversely, the REIT of Canada and Germany (France) switches from net receivers (contributors) of spillovers before the pandemic to net contributors (receivers) during the COVID-19. Finally, we show that News Sentiment index, Geopolitical Risk index, Economic Policy Uncertainty index, US Treasury yield, and Stock Volatility index influence the spillover magnitude across quantiles.     

An index aggregation approach to comparing the overall performance of emerging and developed countries

An index aggregation approach is proposed to carry out comparisons of BRICSAM, a populous rapidly growing economic group consisting of Brazil, Russia, India, China, South Africa, Association of South-East Asian Nations (ASEAN), and Mexico with Group of Seven (G7), the most developed country club including Canada, France, Italy, Japan, Germany, United Kingdom and the United States. It is estimated that by 2050 the accelerated economic activity of BRICSAM could have significant impact on investment flows, legal and regulatory frameworks, the stability of political institutions, human capital and migration flows, competition policy, intellectual property rights, and social and environmental policies. The comparison analyses of BRICSAM and G7 countries could assist people to better understand the status quo of these countries in the global economy and international system, particularly in the areas of economics and responsible activities such as sustainable development, global commitments and transparent practices. Many country-ranking indices, such as the indices given in the global competitiveness report by the World Economic Forum, and the environmental sustainability index by Yale University, constitute evaluations of countries from different perspectives. This paper proposes a data envelopment analysis-based approach to aggregate different ranking indices for BRICSAM and the G7 countries. The approach can provide a fair overall assessment of a country's standing by maximizing its possibility of obtaining the best possible result.     

The impact of COVID-19 on the G7 stock markets: A time-frequency analysis

We examine the co-movement of the G7 stock returns with the numbers of confirmed COVID-19 cases and causalities based on daily data from December 31, 2019 to November 13, 2020. We employ the wavelet coherence approach to measure the impact of the numbers of confirmed cases and deaths on the G7 stock markets. Our findings reveal that both the number of confirmed COVID-19 cases and the number of deaths exhibit strong coherence with the G7 equity markets, although we find heterogeneous results for the Canadian and Japanese equity markets, in which the numbers of COVID-19 cases and the deaths exhibit only a weak relationship. This evidence is more pronounced in the long-term horizon rather than the short-term horizon. Moreover, the lead-lag relationship entails a mix of lead-lag relations across different countries. We present the implications of these findings for both policymakers and the international investment community.