Oil Price Shocks and Volatility in Australian Stock Returns

This paper examines the effect of oil shocks on return and volatility in the sectors of Australian stock market and finds significant effects for most sectors. For the overall market index, an increase in oil price return significantly reduces return, and an increase in oil price return volatility significantly reduces volatility. An advantage of looking at sector returns rather than a general index of stock returns is that sectors may well differ markedly in how they respond to oil price shocks. The energy and material sectors (as expected) and the financial sector (surprisingly) are out of step (in different ways) with results for the other sectors and for the overall index. A rise in oil price increases returns in the energy and material sectors and an increase in oil price return volatility increases stock return volatility in the financial sector. Explanation for the negative (positive) association between oil return (oil return volatility) and returns (volatility of returns) in the financial sector must be based on the association via lending to and/or holdings of corporate bonds issued by firms with significant exposure to oil price fluctuations and their speculative positions in oil‐related instruments.     

Catching-up and Regulation in a Two-Sector Small Open Economy

Deregulation is often aimed at reducing mark-up pricing in technologically stagnant sheltered sectors. The paper shows that this may decrease the process of catching-up and welfare since it shifts resources away from R&D-intensive tradables sectors. Catching-up and deregulation are analyzed in an R&D-based growth model that allows for international capital mobility, trade, and spillovers. Knowledge spillovers raise the productivity of R&D in the exposed sector which results in catching-up. In the long run, the economy grows at the exogenous world growth rate. Capital mobility speeds up convergence. Temporary shocks have long-lasting effects as the economy exhibits hysteresis.     

ESTIMATED DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODEL OF THE TAIWANESE ECONOMY

Abstract.  I develop a small open economy dynamic stochastic general equilibrium model to study monetary policy and the business cycle in Taiwan. Several versions of the model with different representations of Taiwanese monetary policy are estimated using Bayesian techniques. The major findings are that: (i) monetary policy in Taiwan is best described by a money supply growth rate rule; (ii) the Taiwanese economy is more flexible than the Euro area economy; and (iii) export price mark-up and investment-specific technology shocks are the main driving forces of output growth fluctuations in Taiwan.     

Does entry improve welfare? A general equilibrium approach to competition policy

We consider a simple general equilibrium model with imperfect competition. Firms are price takers in the input market and compete à la Cournot in some or all of the product markets and their technologies display constant returns to scale. We show that an increase in the number of firms in a given sector does not always improve welfare. We also provide a characterization in terms of mark-up rates of the sectors for which entry is welfare enhancing. Our results challenge the common idea that mergers with no cost synergy are not desirable for consumers.     

Sectoral and Aggregate Technology Shocks:Is There a Relationship?

We analyze sector-specific shocks in productivity and demand in 19 manufacturing sectors of the Austrian economy. Based on a structural vector autoregressive model (SVAR) with long-run restrictions developed by Galí (1999) we extract technology and non-technology shocks from sectoral and aggregate data. We study their patterns and relationship by means of a principal components analysis and find a close association of sectoral and macroeconomic non-technology shocks but only a very weak association for technology shocks. Impulse response analysis indicates that for almost all manufacturing sectors as well as the aggregate Austrian economy productivity growth rates experience an immediate increase due to positive technology shocks while hours worked decline. Thereby we confirm Galís results on the level of Austrian manufacturing industries. From regression analysis, we find that our shocks are closely associated to employment growth and output growth but not to investment growth and that the reaction is different for the aggregate economy and manufacturing industries.JEL codes: D24, E23, E32, O30We thank Werner Müller and the participants of the 2004 conference of the Austrian Economic Association (NOeG) for helpful comments. We would like to thank an anonymous referee for many helpful comments that led to a substantial improvement of the paper. The usual disclaimer applies. This research project was supported by a research Grant (Project Nr. 9800) of the Jubiläumsfonds der Österreichische Nationalbank (OeNB).     

Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle

Using a robust sign restrictions approach, we study the response of total factor productivity (TFP) to structural shocks in a VAR framework. We find that TFP increases in response to adverse supply, demand, and wage mark-up shocks. Results for monetary policy shocks are insignificant. Following an adverse technology shock and reductions in government spending, TFP declines. Overall, we conclude that TFP fluctuates endogenously over the business cycle, a feature of the data that is not present in standard DSGE models.     

Optimal Monetary Policy and Sectoral Shocks: Is International Monetary Cooperation Beneficial?

A stochastic general‐equilibrium model is used to explore the welfare effects of optimal monetary policy and the potential benefits of policy coordination. Cross‐country perfectly symmetric shocks in the traded goods sectors and imperfectly correlated shocks in the non‐traded goods sectors are considered. In this set‐up, monetary policy may not be able to achieve efficient sectoral resource allocations within countries and avoid inefficient relative price changes across countries. Welfare gains from coordination are sizable if the shocks to the traded and non‐traded goods sectors are negatively correlated and both sectors are of roughly equal size.     

WTO Exceptions as Insurance

The paper formalizes the notion that GATT exceptions such as antidumping and escape clause actions can act as insurance for import competing sectors affected by adverse price shocks. The authors use a general‐equilibrium model with several import competing sectors and assume incomplete markets so that agents cannot contract insurance. It is shown that sector‐specific contingent protection measures are superior to uniform contingent tariffs as an insurance mechanism. A tax‐cum‐subsidy policy (i.e., taxing all sectors in order to subsidize the shocked sector) also improves welfare and is superior to contingent protection.     

Effects of the customs union with the European Union on the market structure and pricing behaviour of the Turkish manufacturing industry

Turkey established a Customs Union with the European Union in 1996. This study aims to analyse the effect of that Customs Union on the market structure and the pricing behaviour of the Turkish manufacturing industry for the period 1994 to 2000. To that end, the price cost mark-up equation of 12 manufacturing industry sectors is estimated using the import and export ratios with European Union countries together with control variables. A second equation is also estimated for the concentration ratio index, taking the trade ratios with European Union countries as explanatory variables. The estimation method is panel data covering eight years and 12 cross-section units. Estimation outcomes indicate that the export and import ratios of trade with European Union countries have a negative relation with the price cost mark-up in the manufacturing sector. It is concluded that increased imports with union countries have created a positive wealth and efficiency effect upon the Turkish manufacturing industry, due to falling price cost mark-ups. Similarly, the concentration ratio equation estimation outcomes indicate that increased imports with union countries have induced a decline in the concentration ratio for the manufacturing industry during the period in question.     

The sectorial impact of commodity price shocks in Australia

This study reports that commodity price shocks predominantly affect the mining, construction and manufacturing industries in Australia. However, the financial and insurance sectors are found to be relatively unaffected. Mining industry profits and nominal output substantially increase in response to commodity price shocks. Construction output is also found to increase significantly, especially in response to a bulk commodity shock, as a result of increased demand for resource related construction. Increased demand for construction has a positive spillover effect to the parts of the manufacturing industry that supply the construction sector with intermediate inputs, such as the non-metallic mineral sub-industry. In contrast, other manufacturing sub-industries with only tenuous links to the resources sector such as textiles, clothing and other manufacturing, are relatively unresponsive to commodity price shocks.     

A mark-up pricing model for price simulations

This paper develops an input/output model of pricing using a mark-up pricing formula. The connection between mark-up pricing and competitive pricing is analyzed through the determination of sectoral equilibrium profit mark-up rates as a function of the profit rate and the capital intensity of each sector. The model is used to analyze the effects on relative prices and the aggregate price level of exogenous changes in the nominal wage rate, tax rates, the exchange rate and world prices. Exogenous changes in the prices of domestically produced commodities are modelled via the imposition of ad valorem tax rates, which yield a measure of the net effect of the exogenous changes. Simulations are carried out under passive price adjustment as well as adjustment with price ceilings. In this last instance the model calculates the endogenously determined reduction in profit mark-ups. Lastly, empirical results of various simulations are presented using data from the Mexican economy.     

Price setting in Indian industry

Price setting models with variable mark-up rates are specified and estimated for four sectors of Indian industry. It is found that capacity utilisation has a significant effect on mark-up rates implying a Phillips curve type trade-off between output and prices. International prices do not appear to be as important in the price-setting behaviour of firms.     

Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks

The traditional argument against the relevance of sector-specific shocks for the aggregate phenomenon of business cycles invokes the law of large numbers: positive shocks in some sectors are offset by negative shocks in other sectors. This paper hypothesizes that cancellation of sector-specific shocks via the law of large numbers is affected by interactions among producing sectors. The analysis is performed within the context of a multisector model similar in spirit to that of Long and Plosser [J. Polit. Econ.91(1983), 39–69]. It is shown that the rate at which the law of large numbers applies is controlled by the rate of increase in the number offullrows in the input-use matrix rather than by the rate of increase in the total number of sectors. Investigations of actual input-use matrices from the U.S. economy reveal that the number of full rows increases much slower than the total number of rows upon disaggregation, and when these input-use matrices are used to parameterize the model, aggregate volatility from sectoral shocks declines at less than half the rate implied by the law of large numbers. This finding leaves open the possibility that a sizeable portion of aggregate volatility is caused by “smaller” shocks to individual sectors. Simple statistics calculated from the model indicate that as much as 80% the volatility in U.S. gross domestic product growth rates could be the result of independent shocks to two-digit Standard Industrial Code sectors.Journal of Economic LiteratureClassification Numbers: E1, E32, C67.     

Measuring market power in the Greek manufacturing and services industries

This paper investigates the level of market power in the Greek manufacturing and services industry over the period 1970–2007. Based on the Roeger methodology, we investigate the competitive conditions in the examined industries at a disaggregated level (two and three digit ISIC codes). The empirical results indicate that the Greek manufacturing and services industries operate in non-competitive conditions. Moreover, average mark-up ratios are heterogeneous across sectors, with manufacturing having higher mark ups on average than services. In contrast to other related studies, we provide sufficient evidence about the movements of mark-up ratios over time. According to our findings, the mark-up ratios in the manufacturing sectors are, on average, higher in the post European Union (EU) accession period (1982–1992), as a result of the merger wave in the manufacturing industry. However, this upward trend stopped within the period (1993–2007), and the relevant ratios have decreased substantially. The econometric results are quite robust when the Two Stage Least Squares (2SLS) and the bootstrap method are applied. Lastly, the results of our analysis have a number of interesting implications for policy makers and government officials in light of the recent financial crisis that hit Greece.     

Cyclical and Competitive Influences on Pricing in Australian Manufacturing

Dynamic pricing equations are estimated using an error correction model, with data on a panel of 89 Australian manufacturing industries for the 14 years, 1971172 through 1984/85. The overall pattern is consistent with prices approximately following a fixed mark-up rule in low concentration industries, while the mark-up factor in high concentration industries is strongly pro-cyclical. Also, in high concentration industries that are heavily exposed to import competition, the mark-up factor increases with prices of foreign competing products and with the general price level for domestic manufactures.     

Energy price shocks and external balances

This paper studies the impact of a wide set of energy price shocks on external balances using a two‐country framework comprising multiple sectors and endogenous energy production with convex costs. The paper disentangles different demand and supply shocks in the energy market through their distinct impact on external balances. It provides a theoretical confirmation of Kilian et al. (2009) and a theoretical foundation to the determining role of the non‐energy trade balance in the transmission of energy price shocks. The presence of durables also highlights the immediate channel through which energy prices impact the non‐energy trade balance.     

The Timing of Purchases and Aggregate Fluctuations

We study the cyclical effects of the timing of durable goods purchases in a general equilibrium model in which both durable and non-durable goods are consumed and the durable good is lumpy. At the microeconomic level, the timing of durable goods purchases supplies some insulation for non-durable consumption over the cycle. At the macroeconomic level, the timing decisions tend to amplify and propagate wealth and income shocks. Our model also allows for endogenous price determination. When the price of the durable changes due to inflexibility of workers between sectors, the effect of adverse shocks is even stronger and longer.     

Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.     

What happens when the Kiwi flies? Sectoral effects of exchange rate shocks on the New Zealand economy

We use a data-rich approach, a factor-augmented vector autoregression (FAVAR), to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the New Zealand economy. We find that an unexpected shock to the exchange rate has significant effects on relatively tradable sectors of the economy. Whilst this is expected, relatively ‘more’ non-tradable sectors of the economy are also influenced by shocks to the exchange rate, presumably due to their linkages to more trade-exposed sectors. We also find that exchange rate shocks explain a small proportion of overall business cycle variability, implying that the exchange rate acts as a buffer rather than as a source of shock.     

THE TRANSMISSION OF MONETARY POLICY IN A MULTISECTOR ECONOMY*

This article constructs and estimates a sticky‐price, Dynamic Stochastic General Equilibrium model with heterogeneous production sectors. Firms in different sectors vary in their price rigidity, production technology, and the combination of material and investment inputs. In particular, firms buy inputs from all sectors using the actual Input–Output Matrix and Capital Flow Table of the U.S. economy. By relaxing the standard assumption of symmetry, this model allows idiosyncratic sectoral dynamics in response to monetary policy shocks. The model is estimated by the Generalized Method of Moments using sectoral and aggregate U.S. time series.