Aggregate demand shortfalls and economic freedom

Political instability is often exacerbated in periods of aggregate demand shortfall. It has been conjectured that inadequate policy responses to recessions may be inimical to free economic institutions. This paper uses the Economic Freedom of the World index as its measure of economic institutions, and finds that the change in economic freedom in the following five, ten, and fifteen years is negatively impacted by an aggregate demand shortfall as measured by negative NGDP growth.     

Oil income shocks and economic growth in Iran

The aim of this paper is to study the relationship between oil revenue shocks and output growth in Iran by Adopting an SVAR model over the period 1959–2008. The results indicate that positive and negative oil revenue shocks significantly affect output growth positively and negatively respectively and these effects are asymmetric. While negative oil revenue shocks adversely affect the economic growth, the resource curse impedes the expected positive effects of positive oil shocks. In order to overcome the harmful effects of oil booms and busts, the establishment of oil stabilization and saving funds, diversifying economy, delinking government expenditure from oil revenues and introducing fiscal rules into the budget seems crucial for Iran economy.     

Demand shocks and economic fluctuations

This paper studies conditions under which demand-side shocks can generate realistic business cycles in RBC models. Although highly persistent demand shocks are necessary for generating procyclical investment, variable capacity utilization and habit formation can reduce the required degree of persistence.     

Aggregate labor market fluctuations under news shocks

The standard RBC model fails to replicate the relationship between aggregate hours worked and average productivity. We propose a DSGE model that incorporates habit formation preferences, capital adjustment costs, and news shocks to solve the puzzle implied in the standard RBC model with only technological shocks. The aggregate labor supply curve is shifted due to the wealth effect caused by the variation of consumption under a news shock. Moreover, capital adjustment costs help amplify the variation of consumption, and thus the movement of the aggregate labor supply curve under the news shock. Also, the aggregate demand curve will be shifted, as it operates in the standard RBC model after the realization of the news shock. As a result of the joint movement of the aggregate labor supply curve and aggregate labor demand curve under the news shock, the model achieves a relationship quite close to the empirically observed relationship.     

Unhedgeable shocks and statistical economic equilibrium

We develop a statistical concept of economic equilibrium as the stationary distribution of a random walk on the exchange equilibrium set (the contract set) of a pure exchange economy induced by unhedgeable shocks that perturb the economy from the exchange equilibrium set and subsequent disequilibrium trading that returns the economy to a new equilibrium. The Fokker–Planck equation for the resulting drift-diffusion process implies that the stationary distribution is independent of the size of the shock so that a small-disturbance limiting distribution is well defined. We present explicit solutions for the statistical equilibrium for the cases of quasilinear and Gorman-aggregatable Cobb–Douglas economies, and illustrate the results in the context of a generic dividend-discount model to emphasize the distinction between insurable risk and unhedgeable uncertainty in this context. The statistical equilibrium of income or wealth for quasilinear economies is described by an exponential Gibbs distribution. The statistical equilibrium income and wealth distributions for Gorman-aggregatable Cobb–Douglas economies can take a wider variety of forms, including power-law and gamma distributions. The statistical equilibria calculated for these examples suggest a close relation to widely observed statistical distributional regularities in real-world economies.     

Aggregate cigarette demand and regional differences in China

National educational level, final consumption expenditure, average propensity to cigarette consumption (APCC) and cigarette price are adopted to research the regional and national aggregate cigarette demand of China. Under the condition that the effects of anti-smoking education in the Chinese current educational system are not remarkable, the theoretical model shows that cigarette demand will increase with the increase of national educational level. Empirical analysis points out that cigarette demand increases with the increase of educational level. Estimates also suggest that cigarette price, consumption expenditure and APCC will affect cigarette demand significantly, and that there are great differences for cigarette demand by region.     

Demand shocks and productivity growth

This paper presents evidence on the relationship between cyclical shocks and productivity growth, for 20 2-digit SIC US manufacturing industries and a set of monetary policy, fiscal policy, and oil price shocks. The paper uses as a measure of productivity change a Solow residual corrected for a wide range of non-technological effects due to imperfect-competition, non-constant returns to scale, and cyclical utilization rates of capital and labor services. The empirical framework identifies policy shocks independently of productivity measurement issues via a two-step procedure. While the typical industry shows weak responses of productivity to the shocks considered, in some industries temporary contractionary policy shocks lead to increases in productivity. In addition, the results reveal that there are localized asymmetries, with contractionary policy shocks having larger productivity effects than their expansionary counterparts. The results support the thesis that job reallocation is an important channel linking contractionary policy shocks and productivity growth. These results support the pit-stop view of downturns.Received: April 200, Accepted: March 2005, António Gomes de Menezes: I thank participants at seminars at Boston College, University of Alberta and Simon Fraser University and two anonymous referees for helpful comments.     

Credit demand and supply shocks in Italy during the Great Recession

In this article, we use Structural VAR analysis to disentangle credit demand and supply shocks and their effect on real economic activity in Italy during the 2008 to 2014 crisis period. The three endogenous variables considered are the loan interest rate, the loans growth rate and the employment to population ratio. The data are observed at annual frequency for each of 103 Italian provinces. The empirical evidence suggests that the variance of the shocks varies across four Italian macro-regions: North, Centre, South and Islands, and hece heteroscedasticity is used to identify (ex ante) the structural shocks. Sign restrictions are used to interpret shocks ex post. The empirical findings suggest a prominent role of credit supply shock in shaping real activity dynamics and also that credit crunch hits the North of Italy less than the remaining macro-regions, especially the South of Italy.     

The relative importance of demand and supply shocks some international evidence

In this paper the contribution of demand and supply shocks of the fluctuation of output and employment is analyzed using quarterly data for four countries (USA, UK, FRG and Switzerland) covering the period 1966 to 1988 in a long run restricted VAR framework for employment, output, the interest rate and inflation. For the USA output and employment fluctuations seem to be dominated by supply shocks in theshort and long run, whereas interest and price level variations are dominated by demand shocks. The result obtained with German and Swiss data are, however, different with two respects: The contribution of demand shocks to output and employment fluctuations are substantial up to a time horizon of eight quarters and price level variations, are at least in the short run, dominated by supply disturbances. Finally, the analysis of the UK data shows the US pattern of results for employment and the price level, but demand shocks are important for output up to four quarters and interest rate movements are dominated by supply shocks.     

Aggregate demand, the wage gap and unemployment in LDC's

This paper begins with the Todaro framework which relates LDC urban unemployment to the existence of an urban-rural wage gap. An explanation of the wage gap is developed from aggregate demand conditions in the urban sector, providing a Keynesian theory of LDC unemployment. Various policies to alleviate LDC unemployment are considered. Aggregate demand policies are most certain of success when the response of urban output to these policies is low, a situation which has usually been held to invalidate demand policies in LDC's. Import substitution policies promote unemployment and should be reversed or even replaced by rural sector subsidization.     

Hyperinflation in Zimbabwe: money demand,seigniorage and aid shocks

Zimbabwe experienced record hyperinflation of 80 billion per cent per month in 2008. This article uses new data from Zimbabwe to investigate money demand under hyperinflation using an autoregressive distributed-lag model for the period 1980–2008. The results produce plausible convergence rates and long-run elasticities, indicating that real-money balances are cointegrated with the inflation rate and signifying an equilibrium relationship between the two series. Evidence is also presented suggesting prices were driven by increases in the money supply rather than by changes in price setting behaviour. The article uses the estimated elasticity on the inflation variable to calculate the maximum level of seigniorage revenue that could be raised in the economy. Actual seigniorage levels increased dramatically after 2000, with inflation eventually exceeding the rate required to maximize this revenue stream. This is discussed in relation to international financing constraints and the collapse of the domestic tax base.     

Aggregate demand, conflict and capacity in the inflationary process

This paper focuses on an alternative perspective on inflationto that of the non-accelerating inflation rate of unemployment(NAIRU). It indicates that there are no automatic forces leadingto a level of aggregate demand consistent with constant inflation.Inflationary pressures arise from conflict over income shares,and from cost elements, with the price of raw materials, especiallyoil, being the most important. There are supply-side factorsimpinging on the inflationary process, which arise from thelevel of productive capacity (relative to aggregate demand).The supply-side constraints are viewed as arising from capacityconstraints, rather than from the operation of the labour market.     

Real business cycles: is neglecting demand shocks justified?

Real business cycle models generally neglect demand shocks. Technological productivity shocks are the primary source of economic fluctuations. The multisectoral consequences of this assumption are described in the well-known model of Long and Plosser (1983). The presented paper shows that according to their view consumer goods sectors must be found in lagging positions. However, generalizing the strong assumption of pure supply driven dynamics by some demand-determined influences leads to ambiguous theoretical results such that only empirical evidence can answer the question whether sectoral lead-lag relationships are in accordance with real business cycle theory. Using cross spectral analysis and causality tests leads to a rejection of the Long and Plosser view of intersectoral comovements. On the contrary, the empirical results suggest that the backward propagation mechanism of demand shocks dominates the forward propagation of supply disturbances.     

Insolvency regimes and firms' default risk under economic uncertainty and shocks

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.     

Population growth and economic growth

This discussion of the issues relating to the problem posed by population explosion in the developing countries and economic growth in the contemporary world covers the following: predictions of economic and social trends; the Malthusian theory of population; the classical or stationary theory of population; the medical triage model; ecological disaster; the Global 2000 study; the limits to growth; critiques of the Limits to Growth model; nonrenewable resources; food and agriculture; population explosion and stabilization; space and ocean colonization; and the limits perspective. The Limits to Growth model, a general equilibrium anti-growth model, is the gloomiest economic model ever constructed. None of the doomsday models, the Malthusian theory, the classical stationary state, the neo-Malthusian medical triage model, the Global 2000 study, are so far reaching in their consequences. The course of events that followed the publication of the "Limits to Growth" in 1972 in the form of 2 oil shocks, food shock, pollution shock, and price shock seemed to bear out formally the gloomy predictions of the thesis with a remarkable speed. The 12 years of economic experience and the knowledge of resource trends postulate that even if the economic pressures visualized by the model are at work they are neither far reaching nor so drastic. Appropriate action can solve them. There are several limitations to the Limits to Growth model. The central theme of the model, which is overshoot and collapse, is unlikely to be the course of events. The model is too aggregative to be realistic. It exaggerates the ecological disaster arising out of the exponential growth of population and industry. The gross underestimation of renewable resources is a basic flaw of the model. The most critical weakness of the model is its gross underestimation of the historical trend of technological progress and the technological possiblities within industry and agriculture. The model does correctly emphasize the exponential growth of population as the source of several complications for economic growth and human welfare. Stabilization of population by reducing fertility is conducive for improving the quality of population and also advances the longterm management of the population growth and work force utilization. The perspective of longterm economic management involves populatio n planning, control of environmental pollution, conservation of scarce resources, exploration of resources, realization of technological possibilities in agriculture and industry and in farm and factory, and achievement of economic growth and its equitable distribution.     

Experimenter demand effects in economic experiments

Experimenter demand effects refer to changes in behavior by experimental subjects due to cues about what constitutes appropriate behavior. We argue that they can either be social or purely cognitive, and that, when they may exist, it crucially matters how they relate to the true experimental objectives. They are usually a potential problem only when they are positively correlated with the true experimental objectives’ predictions, and we identify techniques such as non-deceptive obfuscation to minimize this correlation. We discuss the persuasiveness or otherwise of defenses that can be used against demand effects criticisms when such correlation remains an issue.     

Stochastic growth with correlated production shocks

This paper extends the stochastic growth model of Brock and Mirman [J. Econ. Theory4 (1972), 497–513] to allow the production shocks to be correlated over time. The resultant optimal savings and consumption policies depend not only upon the current level of output but also upon the most recent realization of the random shock. The properties of these policy functions are studied and it is shown that the Markov process on output, capital stock and consumption resulting from the application of these policies converges to a stationary distribution.     

Oil shocks,US economic uncertainty,and emerging stock markets

This paper investigates the impacts of oil price shocks and US economic uncertainty on emerging equity markets within a structural VAR model. I find that both precautionary oil demand and US economic uncertainty shocks have significant negative effects on emerging stock returns, whereas aggregate demand shocks cause a sustained rise of the returns. In particular, the direct effects of oil shocks on emerging stock returns are amplified by the endogenous response of US economic uncertainty. Variance decomposition analysis shows that oil market fundamentals and US economic uncertainty are an important determinant of emerging equity returns, accounting for 35% and 24% of their long-term variations, respectively. The heterogeneous impacts of structural shocks on individual emerging markets, however, suggest that a well-diversified portfolio can be obtainable.