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Article
Publication date: 14 September 2015

Michael Donadelli

– The purpose of this paper is to examine the effects of the 2007-2009 uncertainty shocks on policymakers’ behavior.

Abstract

Purpose

The purpose of this paper is to examine the effects of the 2007-2009 uncertainty shocks on policymakers’ behavior.

Design/methodology/approach

Uncertainty shocks in the US credit, financial and production markets are represented by extraordinary events. As in Bloom (2009), these events are associated with significant economic and political shocks (e.g. Lehman Brothers’ collapse). Credit markets uncertainty shocks, which played a crucial role in the aftermath of the house prices collapse in the USA, are first analyzed in a bivariate VAR context, and then, embodied in a simple theoretical framework.

Findings

The empirical evidence suggests that the US credit, financial and production markets have been affected by a relative large number of uncertainty shocks (i.e. rare events). In a Brainard’s (1967) uncertainty scenario, it is shown that a bizarre money-liquidity relationship exacerbates the “policymakers’ cautiousness-aggressiveness trade-off.” In addition, the model suggests that a “double” dose of policy, in presence of a global credit crunch, might be useless.

Originality/value

This paper improves the existing literature in two main directions. First, it provides novel empirical evidence on the unusual dynamics of the US credit market and its effects on the real economic activity during the crisis. Second, in a very simple theoretical framework accounting for parameter uncertainty, it addresses whether a bizarre money-credit relationship affects policymakers’ behavior (i.e. cautiousness vs aggressiveness).

Details

Journal of Economic Studies, vol. 42 no. 4
Type: Research Article
ISSN: 0144-3585

Keywords

Book part
Publication date: 4 October 2018

Pym Manopimoke, Suthawan Prukumpai and Yuthana Sethapramote

This chapter examines dynamic connectedness among emerging Asian equity markets as well as explores their linkages vis-à-vis other major global markets. We find that international…

Abstract

This chapter examines dynamic connectedness among emerging Asian equity markets as well as explores their linkages vis-à-vis other major global markets. We find that international equity markets are tightly integrated. Measuring connectedness based on a generalized Vector Autoregressive (VAR) model, more than half of all total forecast error variance in equity return and volatility shocks come from other markets as opposed to country own shocks. When examining the degree of connectedness over time, we find that international stock markets have become increasingly connected, with a gentle upward trend since the Asian financial crisis (AFC) but with a rapid burst during the global financial crisis (GFC). Despite the growing importance of Asian emerging markets in the world economy, we find that their influence on advanced economies are still relatively small, with no significant increase over time. During the past decade, advanced markets have been consistently net transmitters of shocks while emerging Asian markets act as net receivers. Based on the nature of equity shock spillovers, we also find that advanced countries are still tightly connected among themselves while intraregional connectedness within Asia remains strong. By investigating whether uncertainty plays an important role in explaining the degree of stock market connectedness, we find that economic policy uncertainty (EPU) from the US is an important source of financial shock spillover for the majority of international equity markets. In contrast, US financial market uncertainty as proxied by the VIX index drives equity market spillovers only among advanced economies.

Details

Banking and Finance Issues in Emerging Markets
Type: Book
ISBN: 978-1-78756-453-4

Keywords

Article
Publication date: 18 May 2021

Ansgar Belke and Pascal Goemans

The purpose of this paper is to investigate whether the macroeconomic effects of government spending shocks vary with the degree of macroeconomic uncertainty.

Abstract

Purpose

The purpose of this paper is to investigate whether the macroeconomic effects of government spending shocks vary with the degree of macroeconomic uncertainty.

Design/methodology/approach

The authors use quarterly US data from 1960 to 2017 and employ the Self-Exciting Interacted VAR (SEIVAR) to compute nonlinear generalized impulse response functions (GIRFs) to an orthogonalized government spending shock during tranquil and in uncertain times. The parsimonious design of the SEIVAR enables us to focus on extreme deciles of the uncertainty distribution and to control for the financing side of the government budget, monetary policy, financial frictions and consumer confidence.

Findings

Fiscal spending has positive output effects in tranquil times, but is contractionary during times of heightened macroeconomic uncertainty. The results indicate an important role of the endogenous response of macroeconomic uncertainty. Investigating different government spending purposes, only increases in research and development expenditures reduce uncertainty and boost output during uncertain times.

Originality/value

The authors contribute to the literature in using a method which allows to control for a large set of confounding factors and accounts for the uncertainty response.

Article
Publication date: 16 September 2022

Dazhong Wu, Mohamad Sepehri, Jian Hua and Feng Xu

This paper aims to conduct an empirical study to investigate whether an industry’s position affects the transmission of information and economic shocks.

Abstract

Purpose

This paper aims to conduct an empirical study to investigate whether an industry’s position affects the transmission of information and economic shocks.

Design/methodology/approach

This paper conducts an empirical study of inventory performance based on a large panel of 71 industries in the manufacturing, wholesale and retail sectors over a 10-year period (2007–2016).

Findings

It is found that the position of a focal industry in the supply chain network moderates the impacts of macroeconomic uncertainty shocks and shocks from supplier/customer industries on the focal industry’s inventory. On the one hand, more central industries are more sensitive to macroeconomic uncertainty shocks as well as spillover shocks from their supplier and customer industries. On the other hand, uncertainty shocks from more central industries have higher impact on their partner industries than those from less central industries.

Practical implications

A manager needs to take into account the network positions of suppliers/customers in supply network when making inventory decisions. For example, when sharing information with partners, the network position of a partner affects how important its information is.

Originality/value

The key novelty of this paper is the introduction of network structure that represents the supplier–customer relationships in the entire economy, and the modeling of uncertainty shocks transmitted through the supply chain network.

Details

Journal of Modelling in Management, vol. 18 no. 6
Type: Research Article
ISSN: 1746-5664

Keywords

Article
Publication date: 15 May 2017

Xiaofen Tan and Yongjiao Ma

The purpose of this paper is to empirically analyze the impact of macroeconomic uncertainty on a large sample of 19 commodity markets.

Abstract

Purpose

The purpose of this paper is to empirically analyze the impact of macroeconomic uncertainty on a large sample of 19 commodity markets.

Design/methodology/approach

The authors rely on Jurado et al.’s (2015) measure of macroeconomic uncertainty based on a wide range of monthly macroeconomic and financial indicators and estimate a threshold VAR model to assess whether the impact of macroeconomic uncertainty on commodity prices differs under the high- or low-uncertainty state.

Findings

The findings show that positive macroeconomic uncertainty shocks affect commodity prices returns negatively on average and the impact of macroeconomic uncertainty is generally higher in high-uncertainty states compared with low-uncertainty states. Besides, although the safe-haven role of precious metals is confirmed, energy and industrial markets are more sensitive to short-run and long-run macroeconomic uncertainty, respectively.

Research limitations/implications

The findings in this study suggest that commodity prices reflect not only the level of economic fundamental but also the volatility of economic fundamental.

Originality/value

This study empirically analyzes and verifies the influence of macroeconomic uncertainty not only on oil prices but also on four groups of 19 raw materials. As for the methodological issues, the authors rely on a structural threshold vector autoregressive specification for modeling commodity price returns to account for potentially different effects depending on the macroeconomic uncertainty states.

Details

China Finance Review International, vol. 7 no. 2
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 4 March 2019

Khandokar Istiak and Md Rafayet Alam

The purpose of this paper is to investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks.

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Abstract

Purpose

The purpose of this paper is to investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks.

Design/methodology/approach

The authors used the test of asymmetric impulse responses proposed by Kilian and Vigfusson (2011) to explore the issue of asymmetry.

Findings

Unlike other studies that assume symmetric effects, this study finds asymmetric effects of oil price and policy uncertainty on inflation expectations for positive and negative shocks and for pre- and post-financial-crisis periods. In particular other things being same, a same magnitude oil price shock has greater effect on inflation expectations in post-crisis period than in pre-crisis period. Moreover, in post-crisis period a positive increasing oil price shock has greater effect on inflation expectations than a negative decreasing oil price shock.

Practical implications

The paper concludes that FED’s greater focus on output stabilization since financial crisis has made inflation expectations less anchored and a sudden surge in oil price may quickly trigger inflation through inflation expectations.

Originality/value

Exploring the issue of the possible asymmetric effects of oil price and economic policy uncertainty on inflation expectations is a relatively new topic (as other studies only assumed symmetry and did not investigate the possible asymmetry in this regard).

Details

Journal of Economic Studies, vol. 46 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 8 May 2017

Mehmet Balcilar, Rangan Gupta and Charl Jooste

The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.

Abstract

Purpose

The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.

Design/methodology/approach

The authors use a sign restricted SVAR with an endogenous feedback of stochastic volatility to evaluate the sign and size of uncertainty shocks. The authors use a nonlinear DSGE model to gain deeper insights about the transmission mechanism of monetary policy uncertainty.

Findings

The authors show that monetary policy volatility is high and constant. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. The DSGE model shows that the size of the uncertainty shock matters – high uncertainty can lead to a severe contraction in output, inflation and interest rates.

Research limitations/implications

The authors model only a few variables in the SVAR – thus missing perhaps other possible channels of shock transmission.

Practical implications

There is a lesson for monetary policy: monetary policy uncertainty, in isolation from general macroeconomic uncertainty, often creates unintended adverse consequences and can perpetuate a weak economic environment. The tasks of central bankers are incredibly difficult. Their models project output and inflation with relatively large uncertainty based on many shocks emanating from various sources. It matters how central bankers react to these expectations and how they communicate the underlying risks associated with setting interest rates.

Originality/value

This is the first study that looks into monetary policy uncertainty into South Africa using a stochastic volatility model and a nonlinear DSGE model. The results should be very useful for the Central Bank as it highlights how uncertainty, that they create, can have adverse economic consequences.

Details

Journal of Economic Studies, vol. 44 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 5 May 2023

Pragati Priya and Chandan Sharma

The study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.

Abstract

Purpose

The study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.

Design/methodology/approach

The authors analyze 5,640 firms for the period 2011–2021. The authors first estimate India’s monetary policy shocks by decomposing the exogenous shocks from the systematic component of monetary policy changes. The authors then examine the effects of the estimated monetary policy shocks and a range of macroeconomic and policy uncertainty indicators on companies’ cash and bank balances to asset ratios using two-step system generalized method of moments (GMM) estimators.

Findings

The authors find that monetary policy shocks cause the cross-sectional variances for the firms’ liquidity holdings to increase. In anticipation of macroeconomic volatility, companies respond to these shocks after taking into account all the firm-level information to minimize the opportunity costs of holding extra cash or too few cash balances that can hamper firms’ operations. Furthermore, compared to other shocks, the contribution of inflation-induced shocks is predicted to be the largest in the cross-sectional deviation of the firm’s cash holdings. The authors also find that low-growth, older and financially constrained firms observe lesser heterogeneity in their cash holdings as they tend to hold cash as a precautionary buffer.

Originality/value

The authors’ approach to the analysis is unique in many ways. To address potential transmission bias, the authors use nowcasts and forecasts of real gross domestic product (GDP) growth and inflation to generate a series of exogenous monetary policy shocks for identifying unanticipated changes in short-term interest rates. Subsequently, the authors estimate how these shocks affect the cross-sectional deviation of liquid assets. For estimating the effects of macroeconomic uncertainty on corporate cash demand, the authors utilize a range of proxies for uncertainty. Unlike previous attempts, the authors offer evidence for a developing and fast-emerging economy.

Details

International Journal of Managerial Finance, vol. 20 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 30 January 2023

Opeoluwa Adeniyi Adeosun, Richard O. Olayeni, Mosab I. Tabash and Suhaib Anagreh

This study investigates the nexus between the returns on oil prices (OP) and unemployment (UR) while taking into account the influences of two of the most representative measures…

Abstract

Purpose

This study investigates the nexus between the returns on oil prices (OP) and unemployment (UR) while taking into account the influences of two of the most representative measures of uncertainty, the Baker et al. (2016) and Caldara and Iacovello (2021) indexes of economic policy uncertainty (EP) and geopolitical risks (GP), in the relationship.

Design/methodology/approach

The authors use data on the US, Canada, France, Italy, Germany and Japan from January 2000 to February 2022 and the UK from January 2000 to December 2021. The authors then apply the continuous wavelet transform (CWT), wavelet coherence (WC), partial wavelet coherence (PWC) and multiple wavelet coherence (MWC) to examine the returns within a time and frequency framework.

Findings

The CWT tracks the movement and evolution of individual return series with evidence of high variances and heterogenous tendencies across frequencies that also align with critical events such as the GFC and COVID-19 pandemic. The WC reveals the presence of a bidirectional relationship between OP and UR across economies, showing that the two variables affect each other. The authors’ findings establish the predictive influence of oil price on unemployment in line with theory and also show that the variation in UR can impact the economy and alter the dynamics of OP. The authors employ the PWC and MWC to capture the impact of uncertainty indexes in the co-movement of oil price and unemployment in line with the theory of “investment under uncertainty”. Taking into account the common effects of EP and GP, PWC finds that uncertainty measures significantly drive the co-movement of oil prices and unemployment. This result is robust when the authors control for the influence of economic activity (proxied by the GDP) in the co-movement. Furthermore, the MWC reveals the combined intensity, strength and significance of both oil prices and the uncertainty measures in predicting unemployment across countries.

Originality/value

This study investigates the relationship between oil prices, uncertainty measures and unemployment under a time and frequency approach.

Highlights

  1. Wavelet approaches are used to examine the relationship between oil prices and unemployment in the G7.

  2. We account for uncertainty measures in the dynamics of oil prices and unemployment.

  3. We observe a bidirectional relationship between oil prices and unemployment.

  4. Uncertainty measures significantly drive oil prices and unemployment co-movement.

  5. Both oil prices and uncertainty measures significantly drive unemployment.

Wavelet approaches are used to examine the relationship between oil prices and unemployment in the G7.

We account for uncertainty measures in the dynamics of oil prices and unemployment.

We observe a bidirectional relationship between oil prices and unemployment.

Uncertainty measures significantly drive oil prices and unemployment co-movement.

Both oil prices and uncertainty measures significantly drive unemployment.

Details

China Finance Review International, vol. 13 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 27 November 2023

Gikas Hardouvelis, Georgios Karalas, Dimitrios Karanastasis and Panagiotis Samartzis

The authors construct an index of economic policy uncertainty (EPU) for Greece using textual analysis and analyze its role in the 10-year Greek economic crisis.

Abstract

Purpose

The authors construct an index of economic policy uncertainty (EPU) for Greece using textual analysis and analyze its role in the 10-year Greek economic crisis.

Design/methodology/approach

To identify the causal relationship between various measures of economic activity and EPU in Greece, the authors use a sophisticated “shock-based” structural vector autoregressive identification scheme. Additionally, the authors use two additional models to ensure the robustness of the results.

Findings

EPU is negatively associated with domestic economic activity and economic sentiment, and positively with bond credit spreads. EPU is also estimated to have prolonged the crisis even in periods when macroeconomic imbalances were cured. The results are robust across various model specifications and different proxies of economic activity.

Originality/value

Brunnermeier (2017) observed that uncertainty may be central to understanding the evolution of the Greek crisis. Yet little attention has been paid to policy uncertainty in the existing long and growing literature on the Greek crisis. The authors attempt to fill this gap.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

Keywords

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