The spillover effect of the US uncertainty on emerging economies: a panel VAR approach

The article quantifies the spillover effects of the United States’ (US) uncertainty shocks on emerging economies, using a panel VAR model. We find that the US uncertainty shocks are the risks, and hence drop the capital inflow, investment, consumption, export and output of emerging economies. This also induces a depreciation of emerging market currencies. As a result, our model predicts a fall in short-term interest rate of emerging economies to react against the US uncertainty shocks. Our findings partly help explain the slow recovery of the world economy after the 2008–2009 global financial crisis.     

Recovery from a currency crisis: some stylized facts

Using a comprehensive data set of over 100 developing countries, this paper examines how economies recover from a currency crisis. Some of the regularities found are listed below. First, it takes less than 3 years for the GDP growth rate to fully recover its tranquil-period average. The level of GDP, however, remains permanently below its initial trend, suggesting that the shocks underlying a crisis are persistent. Second, the credit crunch problem lasts much longer than the reduction in the GDP growth rate. Third, the pre-crisis credit expansion and reserve inadequacy, which have been widely recognized as the main causes of a crisis, also are closely related to the extent of the post-crisis recession. Fourth, crisis episodes that are caused mainly by illiquidity, rather than by insolvency, tend to exhibit a sharp recovery.     

Emerging economy business cycles: Interest rate shocks vs trend shocks

The recent literature studying the source of business cycles in emerging market economies (EMEs) has debated the relative importance of productivity trend shocks versus interest rate shocks coupled with financial frictions. The studies in which an important role is assigned to interest rate shocks do not force their models to match the historical paths of the world or country interest rate. We show that this leads to poorly identified interest rate shocks and inaccurate measures of contributions of shocks to EME business cycles. To address this issue, we estimate a small open economy model for Argentina and Mexico using Bayesian methods where the world and country interest rate series in the model are forced to match their data counterparts. This estimation strategy results in larger variations in interest rate shock and, therefore, shifts explanatory power away from trend shocks towards interest rate shocks, although both shocks remain important.     

The effects of economic policy uncertainty on China’s economy: evidence from time-varying parameter FAVAR

ABSTRACT

This article explores the effects of China’s economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model allows us to capture the time-varying characteristics of the macro-economic variables and which channel is relevant. Empirical results reveal that the reaction of monetary and fiscal policies to EPU is highly asymmetric across macro-economic circumstances. Loose monetary and fiscal policies are adopted in response to EPU shocks during the financial crisis, while policies are moderately tightened after the crisis. The China Interbank Offered Rate (Chibor) responds more sensitively and severely than M2 to EPU shocks. Additionally, EPU shocks have a significant and negative impact on economic growth, consumption, exchange rates, bonds and the stock market, but showing a positive impact on credit, real estate and fixed asset investment (which might be due to China’s special economic market environment and the high investment return). The results indicate that EPU shocks significantly affect macroeconomic fundamentals through precautionary savings and financial market channels but lose their effectiveness through a ‘real options’ effect.     

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.     

Global Imbalances and the Financial Crisis: Reassessing the Role of International Finance

Global current account imbalances have recently been singled out by many as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have put significant downward pressure on world interest rates, thereby fueling a credit boom and risk taking in major advanced economies with current account deficits (the “excess saving” view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) explaining market interest rates through the saving-investment framework; and (ii) drawing inferences about a country's cross-border financing activity based on observations of net capital flows. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary (credit) economy. We conjecture that the main macroeconomic cause of the financial crisis was not “excess saving” but the “excess elasticity” of the international monetary and financial system.     

Do credit shocks matter? A global perspective

This paper examines the importance of credit market shocks in driving global business cycles over the period 1988:1–2009:4. We first estimate common components in various macroeconomic and financial variables of the G-7 countries. We then evaluate the role played by credit market shocks using a series of VAR models. Our findings suggest that these shocks have been influential in driving global activity during the latest global recession. Credit shocks originating in the United States also have a significant impact on the evolution of world growth during global recessions.     

How do financial cycles affect public debt cycles?

We employ the duration framework to study determinants of public debt cycles in 57 advanced and emerging economies over the 1960–2014 period, with a particular focus on the impact of financial cycles. The results suggest that the association between financial and debt cycles is asymmetric. Debt expansions preceded by overheating in credit and financial markets tend to last longer than other expansions, but there is no significant association between financial cycles and debt contractions. There is strong evidence of duration dependence in both phases of the cycle, with the likelihood of expansions and contractions to end increasing with the length of their respective spells. Higher initial level of debt increases the spell of contractions (persistence of adjustment effort hypothesis) and reduces the spell of expansions (debt sustainability hypothesis). The results are robust to the inclusion of global factors, openness, political stability, and debt crisis indicators as additional controls.     

Currency crises and the stock market: empirical evidence for another type of twin crisis

We explore the dependency between currency crises and the stock market in emerging economies. Our focus is two-fold. First, the risk of a currency crisis rises as the foreign stake in the domestic stock market increases. Successful economies with high capital flows into their booming stock markets especially are prone to stock market-induced currency crises. Second, we apply the dividend growth model to show that stock markets crash in the run-up to a currency crisis. This new type of twin crisis is empirically tested by employing a logit framework using quarterly data for 33 emerging economies for 1994Q1–2007Q4.     

CREDIT CRUNCH AND HOUSEHOLD WELFARE,THE CASE OF THE KOREAN FINANCIAL CRISIS*

We examine how the credit crunch in Korea in the late 1990s affected household behaviour and welfare. Using 1996–1998 household panel data, we estimate a consumption Euler equation, augmented by endogenous credit constraints. Korean households coped with the negative shocks of the 1997 credit crunch by reducing consumption of luxury items while maintaining food, education and health related expenditures. Our results show that, in 1997–1998, during the crisis, the probability of facing credit constraints and the resulting expected welfare loss from the binding constraints increased significantly, suggesting the gravity of the credit crunch at the household level.     

Markets contagion during financial crisis: A regime-switching approach

Within a Markov regime-switching VAR framework, we investigate the contagion effects among the stock market, real estate market, credit default market, and energy market covering the most recent financial crisis period when markets experience regime shifts. The results demonstrate that the watershed of regimes occurs around the start of the subprime crisis in 2007, after which the “risky” regime dominates the evolution of market chaos. During the financial crisis, excluding their own shocks, stock market shock and oil price shock are the main driving forces behind the credit default market and stock market variations, respectively. The energy market also appears to be more responsive to the stock market movements than the shocks originating from housing and credit markets. However, the impacts from the credit default market on the real estate market are not significant as expected.     

Implications of the Russian Crisis

The financial crisis of August 1998 caused grave consequences for Russia. Although the mechanism of financial crises in emerging market economies has been thoroughly studied, the role of transition specificity is still underestimated. In the West, there is a widely accepted opinion that fiscal problems were the main driving force behind the crisis. The article contests this view and reveals a number of fundamental reasons that have brought a decade of market romanticism to a bitter end. In fact, the crisis disclosed serious misalignments in the strategy of reforms. Premature liberalisation and a far-fetched reliance on monetarist tools coupled with a lack of institutional, microeconomic and legal transformation hampered the development of market forces, provoked glaring macroeconomic discrepancies and, finally, led to a dramatic decline in production. Present Russian economic policy is aimed at reconciling market reforms with the Soviet economic heritage and the particular transition needs of the country.     

A Theoretical Model of Financial Crisis

The paper develops a new model of private debt financing with an inefficient financial system at its core, where inefficiency is characterized by costly loan monitoring. The model suggests a mechanism that generates the following series of events: a period of low capital inflow despite high rates of economic growth (capital inflow inertia), as observed in the take-off era in the Asian tiger economies; followed by a sudden acceleration of capital inflow (as seen in the 1990s); and then by a crisis, which is defined as a large reduction in the amount of loans intermediated by the financial system (i.e., a large capital outflow or credit crunch). Under certain conditions, financial crisis can occur even when economic fundamentals and market sentiment change only slightly. Unlike most credit rationing models, the results presented here do not hinge on the assumption of asymmetric information. The model also provides guidance about the appropriate policy responses to an imminent crisis.     

Unemployment dynamics in emerging countries: Monetary policy and external shocks

This paper quantifies the impact of three key external shocks – external demand, interest rate, and uncertainty shocks – on emerging market economies (EMEs). We find that external shocks have a sizeable impact on macroeconomic fluctuations in EMEs and that a considerable fraction of this impact is through the domestic stock market. A decrease in external demand and an increase in external interest rate and uncertainty lead to a higher unemployment rate, lower stock market return, and a depreciation of the domestic currency. The EMEs' monetary policy actively responds to external shocks and dampens their impact on domestic activity.     

Exogenous shocks,dynamic correlations,and portfolio risk management for the Asian emerging and other global developed and emerging stock markets

ABSTRACT

This study examines the potential influence of exogenous shocks on time-varying correlations and portfolio strategies between the Asian emerging and other global stock markets including developed and other emerging markets. Using the ARMA-cDCC-FIEGARCH model with and without exogenous shocks, our results highlight the usefulness of including other global stock assets in the traditional portfolio for Asian emerging market investors. However, investors have limited opportunities to diversify their assets during the global financial crisis. Moreover, the shocks from the U.S. stock market have a greater influence on global stock markets compared to that from U.S. economic policy. Fortunately, the model with exogenous shocks improves its accuracy, which plays the same role of controlling structural breaks in the model. More importantly, incorporating exogenous shocks in our model also provides better value-at-risk performance results and hedging effectiveness. These results have several important implications for investors, researchers, and policymakers.     

Do capital flows drive credit growth and consumption in Central and Eastern Europe?

Domestic credit expansion in CEE economies, fuelled in part by foreign capital inflows, helped increase household welfare before the 2008 financial crisis caused a contraction across the region. How strong are the linkages between the current account, domestic credit and consumer spending? This study compiles a quarterly dataset of domestic credit as a share of GDP for 11 CEE European Union members and isolates structural breaks in the series’ growth rates that often align with the 2008 crisis. Vector autoregressive methods, particularly impulse response functions, show that increased current-account deficits lead to increased consumption in six of the 11 countries and increased credit growth in three, and that shocks to credit growth increase consumption in six countries. Capital inflows significantly increase consumption through domestic credit in Slovenia, while the Baltics show a large share of significant effects.     

Reflections on the perspectives of the global economy from the point of view of emerging economies

 Recently a number of emerging economies, with high inflation and various kinds of imbalances have experienced what has come to be referred to as dollarization– the phenomenon of currency substitution where the dollar gradually replaces the national currency in the performance of its fundamental functions. The phenomenon is most commonly encountered as a component of the exchange-rate-based stabilization programs implemented in a number of emerging economies in Latin America, Asia and the Middle East. The fundamental issue we want to explore is whether this process forces the monetary authorities of emerging economies to act with their hands tied, as if caught in a trap. It is argued that when the expansion of liquidity and domestic credit is determined by the quantity of foreign-exchange reserves, an independent monetary policy vanishes and national sovereignty itself is shackled. Since this scenario typically occurs in a world of increasing globalization of finance, this paper also discusses (with reference to emerging economies) the risks and implications of capital inflows for macroeconomic policy autonomy, economic instability, and vulnerability to external shocks.     

Credit and business cycles’ relationship: evidence from Spain

This study provides evidence on the interaction between business and credit cycles in Spain during the period 1970–2014. The paper works on three analyses: the cycle turning points are identified; the main features of credit and business cycles are documented; and in both cycles the causal relationship is assessed. We find differences in the features of the business and credit cycle phases, which lead to a scant degree of synchronization over time. The lack of synchronization might be a sign that the cyclic interaction could be non-contemporaneous. Our results reveal that there is causation. A significant lagged relationship between business and credit cycles is found; specifically, fluctuations of the business cycle lead fluctuations of the credit to non-financial corporations and a lag exists with respect to the fluctuations of the credit to households. We also examine episodes of credit boom and credit crunch. In the period 1970–2014, Spanish credit booms did not involve deeper business cycle contractions and credit crunches were not associated with deeper and longer business cycle contractions. These differences are related with the great importance of the real estate sector in Spain.     

美国次贷危机对中国的启示

发生在美国的次级抵押贷款危机,起源于近年来美国次贷市场的过分膨胀,也是近些年来其国内积累的金融和经济风险不断释放的结果。随着危机的全面爆发,这场危机逐渐演化成为全球信贷紧缩,不但使美国经济的发展进一步放缓,而且对全球金融市场与世界经济产生一定的负面影响,也给中国带来了有益的启示;     

Gender Analysis of the Policy Responses to High Oil Prices: A Case Study of South Africa

ABSTRACT

The 2007–8 surge in oil prices has created concern about its impacts on poor and vulnerable populations in developing countries. Government management of the energy crisis was shown to be important in reducing adverse impacts. This study uses an applied general equilibrium framework to examine alternative policy and external shocks with the recent surge in oil prices in South Africa through a gender lens. Simulation results show that although the 2007–8 energy crisis contributed to slowing down South African gross domestic product (GDP) growth and reducing employment and earnings, the distributional impact between men and women has been neutral. This neutrality is driven by an increase in capital inflows, which has mitigated the exchange rate depreciation owing to the oil price hike. Without an increase in capital inflows, the crisis would have significantly depreciated the exchange rate and contributed to decreasing women's market opportunities and increasing women's workload as compared to men.