Macroeconomic shocks under alternative exchange rate regimes: the Irish experience

The paper investigates the nature of Irish macroeconomic shocks and their correlation with German and UK shocks. A restricted VAR of real output and prices is employed to distinguish aggregate demand and supply shocks for the three countries. To identify the role of Irish exchange rate policy two periods are considered: the preERM period and the ERM period. The results indicate that while the change in exchange rate policy had an effect on the nature of demand and supply shocks, the ERM did not have the effect of increasing the correlation of Irish shocks with Germany or the UK. Evidence of substantial asymmetric shocks with Germany and the UK exist. Thus, Ireland as a member of the EMU faces increased cost of adjustment to asymmetric macroeconomic shocks.     

Bank loan supply shocks and leverage adjustment

We investigate the effect of bank loan supply shocks on firms’ leverage adjustment. We show that the impact of bank shocks is larger for firms with greater dependence on financially troubled banks. We measure firms’ pre-crisis loan dependence on troubled banks by using matched firm–bank loan data. Using the boom-bust cycle from 1987 to 2014 in Japan as a quasi-experiment, we find that financially constrained firms adjust their leverage slower during credit-crunch periods than during other periods. During credit-crunch periods following banking crisis, firms associated with failing banks or with banks that have a limited capacity to supply loans show a slower adjustment than other firms. Bank shocks have significant effects on small firms’ adjustment but not on that of large firms. These results are robust when we consider demand-side effects and perform other robustness tests. Our results imply that bank shocks have a persistent effect on borrowers’ leverage.     

The asymmetric effects of monetary shocks: the case of Turkey

This paper examines whether there is an asymmetry in the effects of positive versus negative and small versus big money supply shocks, and whether the effects of the shocks on output and prices vary over the business cycles in the case of Turkey. Negative shocks to money are found to have greater output and smaller price effects compared to the effects of positive shocks, irrespective of the initial state of the economy. It is also found that monetary shocks of different size affect output growth and inflation rates proportionately. These findings can be interpreted as evidence for the view that the short run aggragate supply curve is convex in such a country like Turkey.     

Euro area,oil and global shocks: An empirical model-based analysis

We assess the impact of oil shocks on euro-area (EA) macroeconomic variables by estimating with Bayesian methods a two-country New Keynesian model of EA and rest of the world (RW). Oil price is determined according to supply and demand conditions in the world oil market. We obtain the following results. First, a 10% increase in the international price of oil generates an increase of about 0.1 annualized percentage points in EA consumer price inflation. Second, the same increase in the oil price generates a decrease in EA gross domestic product (GDP) of around 0.1% and a trade deficit, if it is due to negative oil supply or positive oil-specific demand shocks. Third, it generates a mild EA GDP increase and a trade surplus if due to a positive RW aggregate demand shock. Fourth, the increase in the oil price over the 2004–2008 period did not induce stagflationary effects on the EA economy because it was associated with positive RW aggregate demand shocks. The drop in RW aggregate demand contributes to explain the 2008 fall in oil prices, EA GDP and inflation.     

Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach

This paper models logistic and exponential smooth transition adjustments of real exchange rates for six major oil-exporting countries in response to different shocks affecting oil prices. The logistic form captures asymmetric and the exponential form symmetric adjustments in regards to positive and negative oil price shocks. We chose oil-exporting countries that do not peg their exchange rates. For most countries, we detect no statistically significant non-linearities for the adjustment process of real exchange rate returns, be they asymmetric or symmetric, in response to oil supply shocks, idiosyncratic oil-market-specific shocks, and speculative oil-market shocks. Exceptions are oil supply shocks in the UK and possibly Brazil, where exchange rates respond nonlinearly, though the effects are symmetric for both countries. On the other hand, global aggregate demand shocks, which are shocks not originating directly in the oil market, have nonlinear asymmetric effects on real exchange rate returns for Canada, Mexico, Norway and Russia, and nonlinear symmetric effects for Brazil and the UK.     

Variability in the effects of uncertainty shocks: New stylized facts from OECD countries

This study examines variability in the effects of uncertainty shocks using a panel of international data. It first evaluates variability in the effects of uncertainty shocks by applying rolling sample and time-varying parameter Vector Autoregression models to US data covering the past 70 years. The results reveal that the effects of uncertainty shocks on the US economy have changed substantially over time. First, the negative effect of uncertainty shocks on the output decreased until the recent period, in which monetary policy rules are constrained by the zero lower bound. Second, contrary to the negative aggregate demand interpretation in the recent literature, uncertainty shocks acted as a negative aggregate supply shock in the earlier periods. From the past 50 years’ data for 12 small open economies, I find that the negative effect of uncertainty shocks on output has increased, contrary to the US case. Additionally, the exchange rate and inflation responses are heterogeneous across countries, and the country’s commodity exporter or safe haven status is critical in determining the sign of these responses. Finally, the increased vulnerability of small open economies to uncertainty shocks is associated with an increase in international trade.     

Idiosyncratic and international transmission of shocks in the G7: Does EMU matter?

This paper analyzes the transmission of shocks across the Group of Seven industrialized countries (G7) before and after the introduction of the euro. We estimate global vector autoregressive (VAR) models for different periods to investigate changes in the domestic and international adjustment of macroeconomic variables following supply, demand, and nominal shocks. The shocks are identified with robust sign restrictions, which we derive from a small open economy dynamic stochastic general equilibrium (DSGE) model. Specifically, we analyze the adjustment of output, inflation, and the real effective exchange rate following those shocks. Our results indicate that changes in the adjustment are due to global convergence rather than to regional‐specific convergence.     

Macroeconomic shocks and stock market returns: the case of Korea

This study examines the effects of macroeconomic shocks on key macro variables, including stock market returns in Korea, using the structural vector autoregression (SVAR) model. We suggest a three-variable SVAR model incorporating inflation, output growth and stock returns. We adopt a nonzero z-ratio restriction for the long-run identifying assumption to allow for economically meaningful relationships among variables. While our results support the negative (positive) relation of demand (supply) shocks to stock returns, we also find that demand shocks influence stock market variance more significantly than supply shocks do. The sub-period analysis finds that global market fluctuations during the global financial crisis have relatively little effect on Korean stock market performance. We also examine a generalized five-variable model that includes the foreign exchange rate and interest rate, confirming the results from the three-variable case.     

Aggregate demand shocks and economic growth

The traditional view of growth and fluctuations implies that aggregate demand shocks result in only transitory departures from trend or “normal” output, which is determined exclusively by aggregate supply factors. Using a simple dynamic framework for a less-developed economy, a series of models is developed to show that aggregate demand can have a permanent effect on economic growth. It is shown that even if the economy converges to some “normal” path, this path itself may be altered by large demand shocks, due to increasing returns and hysteresis effects in labor markets and balance of payments constraints. It is also shown that the economy may not converge to its “normal” path, in which case fiscal and monetary policy will have long-term effects on output and growth.     

Foreign output and price shocks and macroeconomic activity in Korea

This paper examines the effects of foreign output and price shocks on output and the price level in Korea. The framework is a nine variable VAR model which includes output, price level, interest rate, real exchange rate, money supply, government expenditures, government debt, and foreign output and price variables. Foreign output and price effects are evaluated through computation of variance decompositions and impulse response functions. The variance decompositions indicate significant effects of foreign output on domestic output and significant effects of foreign prices on domestic output and the price level. The impulse response functions indicate positive short-run effects of foreign output on domestic output but insignificant effects on the price level while foreign price shocks have significant negative effects on output and significant positive effects on the price level for approximately two years. The results indicate the importance of including foreign shock variables when modeling the Korean economy.     

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.     

Accommodation,supply shocks,and sluggish real wages

This paper analyzes the policy dilemmas posed by supply shocks in a rational expectations model featuring sluggish real wages. A discrete time version of the model is used to calculate the variances for prices, wages, and output for alternative policy rules and speeds of adjustment for real wages. The conventional tradeoffs between output and price variability in the model do not always exist.     

Supply shocks and the interdependence of macroeconomic stability under flexible exchange rates

This paper analyzes the effects of a change in the monetary policy of a large economy on the macroeconomic stability of a small open economy with high dependence on imported intermediate goods. The analysis is carried out using the Taylor framework where the money supply rule is specified by the degree of monetary accommodation of price shocks. A supply shock to the large country is transmitted as both demand and supply shocks to the small country. A shift toward less monetary accommodation by the large country is shown to increase both price and output instability in the small country through the supply side linkage, while it may enhance price or output stability through the demand side linkage. Simulation results for Germany and Japan suggest that the supply side effect on price stability is important and that the effect on output stability depends crucially on the importance of trade in goods between the large country and the country in question.     

The transmission of financial shocks in an estimated DSGE model with housing and banking

We develop a dynamic stochastic general equilibrium (DSGE) model with housing and banking to study the transmission of financial shocks between the financial and real sectors. A deterioration in the bank's balance sheet induced by financial shocks could have amplified and persistent impacts on real activities. The amplification of the shocks are originated from financial frictions tied to households and banks. We find that a disruption in bank net worth initiated by capital quality shocks generates a decline in household loans, house prices and output. Bank liquidity shocks also have negative effects on these variables. Housing preference shocks could generate a positive comovement between house prices and output. All these findings are qualitatively consistent with empirical evidence, suggesting that these financial shocks are critical to the dynamics of house prices and other macroeconomic variables.     

Output volatility,composition of trade,and transmission of economic shocks across countries

In this paper we investigate how supply and demand shocks in one country affect output volatility in other countries. While the evidence for cross‐country transmission of demand shocks is mixed, we find that volatile supply in one country leads to larger imports and output volatility in other countries. As a result, the effect of trade openness on output volatility is highly heterogeneous across countries and depends on the composition of their trade. Those countries whose imports originate in economies with volatile supply experience a greater impact of trade on output volatility.     

IS THE PHILLIPS CURVE DIFFERENT IN POOR COUNTRIES?

It has been suggested that the Phillips curve (positive output‐inflation correlation) is inverted in poor countries. It is argued here that the truth is more complex. In poor countries temporary supply‐side shocks, for example to agricultural output, induce a negative correlation between prices and output rather than between inflation rates and output. Empirical evidence supports this hypothesis.     

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.

     

Why are the effects of money-supply shocks asymmetric? Convex aggregate supply or “pushing on a string”?

This paper examines whether the asymmetric effect of money on output is an international phenomenon and investigates the reasons for this asymmetry. Annual data from the 1950–1990 period for a panel of 38 countries strongly support asymmetry internationally: negative money-supply shocks are shown to have a stronger effect on output than positive shocks (whose effect is often statistically insignificant). Next, the paper distinguishes between two types of theories that are consistent with the observed output effects: the convex aggregate supply and the “pushing on a string” views, that predict that money shocks have different asymmetric effects on prices. Somewhat surprisingly, however, the effects of money on prices are shown to be symmetric. This finding is consistent with both theories being operative.     

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.

     

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.