Structural financial instability and cyclical fluctuations

This paper introduces and discusses an heuristic model meant to clarify why and how economic instability may play a crucial role in a modern sophisticated monetary economy. In this model economic instability is specified in terms of structural instability rather than in the usual terms of dynamic instability. This different view of instability implies a different approach to the analysis of the dynamic behaviour of the economic system and of its structural changes. In particular, the qualitative changes in the economic behaviour of the economic system are seen not as purely exogenous as in the received view but as essentially endogenous. This approach is applied to the analysis of financial crises and of their impact on the fluctuations of a sophisticated monetary economy. The crucial variable, the degree of financial fragility of the economic units, is specified in terms of structural instability, and this implies that, beyond certain thresholds of its value, the qualitative characteristics of their dynamic behaviour change radically in such a way to produce cyclical, though fairly irregular, fluctuations. The interplay between these microeconomic fluctuations is sufficient to produce cyclical macroeconomic fluctuations whose characteristics and implications for policy are briefly examined.     

The macroeconomic impact of financial and uncertainty shocks

The extraordinary events surrounding the Great Recession have cast a considerable doubt on the traditional sources of macroeconomic instability. In their place, economists have singled out financial and uncertainty shocks as potentially important drivers of economic fluctuations. Empirically distinguishing between these two types of shocks, however, is difficult because increases in economic uncertainty are strongly associated with a widening of credit spreads, an indication of a tightening in financial conditions. This paper uses the penalty function approach within the SVAR framework to examine the interaction between financial conditions and economic uncertainty and to trace out the impact of these two types of shocks on the economy. The results indicate that (1) financial shocks have a significant adverse effect on economic outcomes and that such shocks were an important source of cyclical fluctuations since the mid-1980s; (2) uncertainty shocks, especially those implied by uncertainty proxies that do not rely on financial asset prices, are also an important source of macroeconomic disturbances; and (3) uncertainty shocks have an especially negative economic impact in situations where they elicit a concomitant tightening of financial conditions. Evidence suggests that the Great Recession was likely an acute manifestation of the toxic interaction between uncertainty and financial shocks.     

The equity price channel in a New-Keynesian DSGE model with financial frictions and banking

This paper studies the role of the equity price channel in business cycle fluctuations, and highlights the equity price channel as a different aspect to general equilibrium models with financial frictions and, as a result, emphasizes the systemic influence of financial markets on the real economy. We develop a canonical dynamic general equilibrium model with a tractable role for the equity market in banking, entrepreneur and household economic activities. The model is estimated with Bayesian techniques using U.S. data over the sample period 1982Q01–2015Q01. We show that a dynamic general equilibrium model with an equity price channel well mimics the U.S. business cycle. The model reproduces the strong procyclicality of the equity price. The equity price channel significantly exacerbates business cycle fluctuations through both financial accelerator and bank capital channels. Our results support the increasing emphasis on common equity capital in Basel III regulations. This is beneficial in terms of financial stability, but amplifies and propagates shocks to the real economy.     

ON THE SOURCES OF AGGREGATE FLUCTUATIONS IN EMERGING ECONOMIES

Recent research on macroeconomic fluctuations in emerging economies has advocated introducing a stochastic productivity trend or allowing for interest rate shocks and financial frictions. We estimate a model that encompasses these two approaches, shedding light on their relative merits and on how financial frictions affect the transmission of shocks. The model accounts for aggregate fluctuations by assigning a dominant role to financial frictions in amplifying conventional (temporary) productivity shocks, whereas trend shocks play a minor role. A link between spreads and expected future productivity emerges as essential for a reasonable approximation to the data.     

资本账户开放与国际金融冲击的传导——基于DSGE模型的分析

本文在动态随机一般均衡的框架下,建立了一个包括贸易部门和非贸易部门的小型开放经济模型,系统研究和比较资本管制与资本账户开放两种情况下,国外金融冲击、出口需求冲击对中国经济的不同影响和传导机制,并检验资本账户开放情形下应对国际冲击时不同货币政策规则的有效性。结果发现：当资本账户开放时,一国受到国外冲击的波动幅度远大于资本管制的情况;资本管制和资本账户开放对国际金融冲击传导机制的关键差异在于贸易部门与非贸易部门的互动关系,具体表现为劳动力转移的差异;在资本账户开放后,面对不同形式的国际冲击,货币数量型规则和混合型规则均能有效熨平经济波动。     

The Impacts of Land and Real Estate Price Fluctuations on Financial Stability: Evidence from China

We construct a provincial financial stability index, and use panel vector autoregression to construct a model for empirical testing. We find that local governments' reliance on land grant premiums amplifies the impact on financial stability. In addition, the relationship between the real estate market and the financial system allows real estate price fluctuations to significantly affect market participants, further impacting financial system stability. Finally, in the eastern region, land price fluctuations have a less adverse impact on financial stability, while in other regions, rising commodity real estate prices are the biggest threat to financial stability.     

GOVERNMENT POLICY IN MONETARY ECONOMIES*

I study how the general and specific details of a micro‐founded monetary framework affect the determination of policy when the government has limited commitment. In the general framework, policy is determined by the interaction between the incentives to smooth distortion intertemporally and a time‐consistency problem. Resolving financial and trading frictions affects long‐run policy significantly. Policy response to fluctuations in productivity is quantitatively different across model variants, mainly due to the idiosyncratic behavior of the money demand. Other types of shocks, both transitory and permanent, affect policy in a similar manner across a variety of specifications.     

近期汇率体制改革后股价与汇率的联动效应及其检验

在全球外部失衡的宏观背景下，伴随着中国经济体制市场化和金融深化进程的加快，股票价格同汇率波动的相关性日益增强。根据从理论层面阐释二者相互作用的潜在机制和渠道，并采用中国的数据利用协整分析，发现在汇率体制改革（2005年7月21日）之后，二者的波动存在稳定的协整关系和双向的因果关系。因此，应理顺二者的互动机制需要推进各方面的综合改革，理顺这两个核心变量的互动机制，保持经济高效和健康发展。     

Investment, credit, and endogenous cycles

This paper presents a general-equilibrium dynamic Ramsey-type model that can generate endogenous cycle. We assume two different representative agents, borrowers and lenders, and financial intermediaries with inside and outside money. We investigate under which conditions this model presents a cyclical relationship between capital and loans. The sources of endogenous fluctuations in this model come from a credit restriction in the representative-borrower problem.     

ASIAN FINANCIAL LINKAGE: MACRO‐FINANCE DISSONANCE

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activity? To answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz and gauge the degree of interaction in both financial markets and real economic activity among Asian economies. We first show that the degree of the international spillover in stock markets is uniform, irrespective of the groups of countries concerned, such as the G3 and ASEAN4. This suggests the importance of global common shocks in stock markets. We then discuss the macro‐finance dissonance. In stock and bond markets, the United States has been the main driver of fluctuations. However, China has emerged as an important source of fluctuations in real economic activity.     

金融加速器效应在中国存在吗?

本文从金融加速器理论出发,运用门限向量自回归(TVAR)模型在宏观层面上对中国信贷市场与宏观经济波动的非线性关联展开实证研究。通过非线性脉冲响应函数的检验结果我们发现:在1990年1月至2006年5月期间,中国存在显著的金融加速器效应,表现为对于相同特征的各种外生冲击,经济波动在信贷市场处于"紧缩"状态下的反应均明显强于信贷市场处于"放松"状态下的反应。另外,信贷冲击对于信贷市场状态变化的作用最为显著,其次是货币冲击和价格冲击,最后是实际冲击。进一步的检验还表明:信贷市场在宏观经济波动过程中既是重要的波动源,同时也是波动的有力传导媒介,运用金融加速器理论有助于合理解释中国宏观经济波动的轨迹特征。最后本文阐述了实证结论的政策含义和未来研究的侧重点。     

Sources of business fluctuations: Financial or technology shocks?

Despite the widespread belief that technology shocks are the main source of business fluctuations, recent empirical studies indicate that in the absence of financial frictions, a shock to the marginal efficiency of investment is the main source and is closely related to financial conditions for investment. We incorporate a financial accelerator mechanism and two types of financial shocks to the external finance premium and net worth in a dynamic stochastic general equilibrium model with shocks to the marginal efficiency of investment, the investment-good price markup, and the rates of neutral and investment-specific technological changes. This model is estimated using eleven US time series that include data on loan, net worth, the loan rate, and the relative price of investment. Our estimation results show that the (non-stationary) neutral and investment-specific technology shocks primarily drive output and investment fluctuations, while the external finance premium shock plays an important role for investment fluctuations. This financial shock induced substantial falls and subsequent sharp hikes in the external finance premium and caused boom–bust cycles over the past two decades.     

A neoclassical analysis of the Korean crisis

In late 1997, Korea experienced a huge and unusual economic crisis. The three main features of this crisis are the sudden recession, the rapid recovery and a consumption drop as large as the output drop. A large body of literature qualitatively explains the Korean crisis in terms of financial and monetary variables such as exchange rates and interest rates. This paper complements these studies by quantitatively analyzing fluctuations in real macroeconomic variables such as real GDP and consumption. A stochastic small open economy neoclassical model can quantitatively account for the Korean crisis taking TFP and real interest rates as exogenous.     

BUSINESS CYCLES IN SMALL OPEN ECONOMIES: EVIDENCE FROM PANEL DATA BETWEEN 1900 AND 2013

Using a novel data set for 17 countries between 1900 and 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Common disturbances explain one third of the fluctuations in small open economies, especially during important worldwide phenomena.     

Firm dynamics and markup variations: Implications for sunspot equilibria and endogenous economic fluctuations

This paper analyzes how the interaction between firms’ entry-and-exit decisions and variations in competition gives rise to self-fulfilling, expectation-driven fluctuations in aggregate economic activity and in measured total factor productivity (TFP). The analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups. This interaction leads to indeterminacy in which economic fluctuations occur as a result of self-fulfilling shifts in the beliefs of rational forward looking agents. When calibrated with empirically plausible parameter values and driven solely by self-fulfilling shocks to expectations, the model can quantitatively account for the main empirical regularities characterizing postwar U.S. business cycles and for 65% of the fluctuations in measured TFP.     

Endogenous growth cycles with financial intermediaries and entrepreneurial innovation

This study analyzes the effects of financial intermediaries’ activities on economic fluctuations in a model of endogenous innovation cycles. In the model, I consider an economy in which entrepreneurs and financial intermediaries engage in their respective innovative activities. Entrepreneurs can invent new products and raise funds for their invention from financial intermediaries and if their invention is successful, they can produce new products. Only financial intermediaries can evaluate entrepreneurial ideas regarding their new products. Moreover, they can invest their capital to improve information about the entrepreneurial ideas and thus, meet successful entrepreneurs with a higher probability. I show that when an economy does not accumulate enough capital, and the level of financial innovation is not sufficiently high, the economy is trapped in a no-entrepreneurial innovation regime. I also show that when the financial innovation slightly develops, the economy fluctuates between the no-entrepreneurial innovation and entrepreneurial innovation regimes.     

Interactions between real economic and financial sides of the US economy in a regime-switching environment

This objective of this study is to examine the linkages between real (economic) and financial variables in the United States in a regime-switching environment that accounts explicitly for high volatility in the stock market and high stress in financial markets. Since the linearity test shows that the linear model should be rejected, we employ the Markov-switching VECM to examine the same objective using the Bayesian Markov-chain Monte Carlo method. The regime-dependent impulse response function (RDIRF) highlights the increasing importance of the financial sector of the economy during stress periods. The responses and their fluctuations are significantly greater in the high-volatility regime than in the low-volatility regime.     

The interdependence of global oil price,China's stock price and economic policy uncertainty

This investigation examines the interaction among global oil price (OP), China's stock price (SP) and China's economic policy uncertainty (EPU) during the period of 2005:01 and 2017:12. A rolling window Toda‐Yamamoto causality method shows a complex time‐varying relationship. Bilateral causalities between these variables mostly accompany by sharp fluctuations in global or China's economy. Taking into account the inherent consistency of this time‐varying relation, the causal steps approach shows EPU follows a partial but time‐varying mediator process during crisis periods, which suggests EPU is one of mediator variables in this transmission mechanism. The mediator role of EPU in the transmission mechanism of OP and SP has not been paid enough attention before. Our findings provide a new direction for investors from the perspective of policy changes to deal with risks caused by OP and SP fluctuations especially when the financial market experiencing huge fluctuations.     

Financial cycle and business cycle: An empirical analysis based on the data from the U.S

In this paper, we first study the relationship between the financial cycle and the business cycle in the time and frequency domain. Then we also explore the interactions and dynamic mechanisms of the financial cycle, the business cycle, real interest rate and exchange rate by the VAR model. The empirical results show that the financial cycle is closely related to the business cycle, especially at medium-term frequencies (8–30 years), the business cycle leads the financial cycle with a high positive correlation. However, the relationship between them is not significant during the Great Moderation at business-cycle (2–4 years). In addition, the financial cycle not only becomes a main driver of real interest rate, the financial cycle and the business cycle, but also serves as an important source of the business cycle fluctuations. In general, our results lay some theoretical foundation for the policy practice of financial and economic stability.     

Measuring the financial soundness of U.S. firms, 1926–2012

We measure the distribution of firms’ financial soundness over most of the last century for a broad cross section of firms. We highlight three main findings for this key aggregate state variable. First, the three worst recessions between 1926 and 2012 coincided with sharp deteriorations in the financial soundness of all firms, but other recessions did not. Second, fluctuations in total asset volatility, rather than fluctuations in leverage, appear to drive most of the variation in the distribution of firms’ financial soundness. Finally, the distribution of financial soundness for large financial firms 1962–2007 largely resembles that for large nonfinancial firms.