Policy Shocks and Contract Renegotiation: Who Gets Raked Over the Coals?

Changes in climate policy have large influence on businesses. Firms anticipate and respond to such changes, but what if they have already engaged in a longterm relationship with other firms or customers at the time of policy change? For example, coal supply to power stations is typically based on long-term contracts, while the nature of the buyer-supplier relationship may well be affected substantially by climate regulations. However, there has been little evidence on whether or how firms amend their contractual agreements in response to a change in policy.

Productivity shocks and aggregate fluctuations in an estimated endogenous growth model with human capital

Employing an endogenous growth model with human capital, this paper explores how productivity shocks in the goods and human capital producing sectors contribute to explaining aggregate fluctuations in output, consumption, investment and hours. Given the importance of accounting for both the dynamics and the trends in the data not captured by the theoretical growth model, we introduce a vector error correction model (VECM) of the measurement errors and estimate the model’s posterior density function using Bayesian methods. To contextualize our findings with those in the literature, we also assess whether the endogenous growth model or the standard real business cycle model better explains the observed variation in these aggregates. In addressing these issues we contribute to both the methods of analysis and the ongoing debate regarding the effects of innovations to productivity on macroeconomic activity.

Stock Market Liquidity and Macro-Liquidity Shocks: Evidence from the 2007-2009 Financial Crisis

We develop an empirical framework that links micro-liquidity, macro-liquidity and stock prices. We provide evidence of a strong link between macro-liquidity shocks and the returns of UK stock portfolios constructed on the basis of micro-liquidity measures between 1999-2012. Specifically, macro-liquidity shocks, which are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in 3-month LIBOR futures prices, are transmitted in a differential manner to the cross-section of liquidity-sorted portfolios, with liquid stocks playing the most active role. We also find that there is a significant increase in shares’ trading activity and a rather small increase in their trading cost on MPC meeting days. Finally, our results emphatically document that during the recent financial crisis the shocks-returns relationship has reversed its sign. Interest rate cuts during the crisis were perceived by market participants as a signal of deteriorating economic prospects and reinforced “flight to safety” trading.

News Shocks and Business Cycles: Bridging the Gap from Different Methodologies

An important disconnect in the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between different—VAR and DSGE—methodologies over the empirical plausibility of this view. We argue that this disconnect can be largely resolved once we augment a standard DSGE model with a financial channel that provides amplification to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be significant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies

Heterogeneous dynamics, aggregation and the persistence of economic shocks

It has been recently emphasized that, if individuals have heterogeneous dynamics, estimates of shock persistence based on aggregate data are significatively higher than those derived from its disaggregate counterpart. However, a careful examination of the implications of this statement on the various tools routinely employed to measure persistence is missing in the literature. This paper formally examines this issue. We consider a disaggregate linear model with heterogeneous dynamics and compare the values of several measures of persistence across aggregation levels. Interestingly, we show that the average persistence of aggregate shocks, as measured by the impulse response function (IRF) of the aggregate model or by the average of the individual IRFs, is identical on all horizons. This result remains true even in situations where the units are (short-memory) stationary but the aggregate process is long-memory or even nonstationary. In contrast, other popular persistence measures, such as the sum of the autoregressive coefficients or the largest autoregressive root, tend to be higher the higher the aggregation level. We argue, however, that this should be seen more as an undesirable property of these measures than as evidence of different average persistence across aggregation levels. The results are illustrated in an application using U.S. inflation data.

Oil price shocks and labor market fluctuations

We examine the impact of real oil price shocks on labor market flows in the U.S. We first use smooth transition regression (STR) models to investigate to what extent oil prices can be considered as a driving force of labor market fluctuations. Then we develop and calibrate a modified version of Pissarides' (2000) model with energy costs, which we simulate in response to shocks mimicking the behavior of the actual oil price shocks. We find that (i) these shocks are an important driving force of job market flows; (ii) the job finding probability is the main transmission mechanism of such shocks; and (iii) they bring a new amplification mechanism for the volatility and should thus be seen as complementary of labor productivity shocks. Overall we conclude that shocks in oil prices cannot be neglected in explaining cyclical labor adjustments in the U.S.

Macroeconomic shocks and the business cycle: evidence from a structural factor model

We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters, Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian "cleansing" view of recessions.

Tax evasion, technology shocks, and the cyclicality of government revenues

This paper analyzes the behavior of the tax revenue to output ratio over the business cycle. In order to replicate the empirical evidence, we develop a simple model combining the standard Ak growth model with the tax evasion phenomenon. When individuals conceal part of their true income from the tax authority, they face the risk of being audited and hence of paying the corresponding fine. Under the empirically plausible assumptions that the intertemporal elasticity of substitution exhibits a sufficiently small value and that productivity shocks are serially correlated, we show that the elasticity of government revenue with respect to output is larger than one, which agrees with the empirical evidence. This result holds even if the tax system displays flat tax rates. We extend the previous setup to generate larger fiscal deficits when the economy experiences a recession.

Survival and Molting Incidence after Heat and Cold Shocks in Panstrongylus megistus Burmeister

Survival and molting incidence were studied after heat (40°C) and cold (0°C) shocks in specimens of Panstrongylus megistus with the aim of establishing its response to temperature stress under laboratory rearing conditions and to understand occasional changes in the biological characteristics of specimens captured in nature. The response to the thermal shocks was found to vary as a function of the temperature and duration of the shock, developmental phase and sex of the specimens, and in certain cases, the insect habit and nourishment conditions. P. megistus specimens were found to be less resistant to the heat shock assay than Triatoma infestans, another reduviid species. The short cold shock affected survival of P. megistus more than did the heat shock, survival of fully-nourished specimens being preferential. The response of adults to the short cold shock was affected by sex, males being generally less resistant. The insect sylvatic habit was found to seldom affect the thermal shock response established for specimens with domestic habit. A decrease in molting frequency and sometimes a slowdown of the molting rate were found after the short heat and cold shocks, possibly promoted by change in hormonal balance, and differing from patterns reported for T. infestans. The results indicate that no generalization should be made for different reduviid species in terms of the effects of temperature shocks.

Effect of Sequential Cold Shocks on Survival and Molting Rate in Triatoma infestans Klug

The survival and molting incidence in Triatoma infestans, a vector of Chagas disease, were investigated following sequential shocks at 0ºC in fifth instar nymphs under moderate fasting and full nutritional conditions. The shocks were separated by intervals of 8 h and 24 h at 30ºC. The results indicated that in terms of insect survival, T. infestans is tolerant to a single cold shock at 0ºC even for 12 h, or to sequential cold shocks, regardless of the nutritional state of the specimens. In terms of molting rate, fasting enhanced the tolerance to sequential cold shocks, but did not exceed the tolerance acquired by fully-nourished specimens, except when cold shocks were separated by an 8 h interval at 30ºC. The protective action elicited by fasting was assumed to be additive to that induced by a single mild cold shock or sequential cold shocks. The cold-tolerance response of T. infestans may have favoured its survival in areas of South America with low temperatures, even considering that this species is predominantly associated with human habitats.

Changes in nuclear phenotype frequencies following sequential cold shocks in Triatoma infestans (Hemiptera, Reduviidae)

The nuclear phenotypes of Malpighian tubule cells in fifth instar nymphs of Triatoma infestans, one of the most important vectors of Chagas disease, were studied following sequential shocks at 0ºC, separated by intervals of 8 h and 24 h at 30ºC, under conditions of moderate fasting and full nourishment. The insects pertained to colonies reared in the laboratory and originated from domestic specimens collected in the Brazilian states of São Paulo (north) and Minas Gerais (south). Since nuclear phenotypes in this species are affected by single cold shocks, it was expected that these phenotypes could also be changed by sequential shocks. Nuclear phenotypes indicative of mechanisms of cell survival (nuclear fusion and heterochromatin decondensation) and cell death (apoptosis and necrosis) were observed concomitantly in all the conditions tested. Nuclear fusion and heterochromatin decondensation were not found relevant for the presumed acquisition of the cold-hardening response in T. infestans. The decreased frequency of apoptosis and necrosis following sequential cold shocks including under fasting conditions, indicated that tolerance to sequential cold shocks occurred in T. infestans of the mentioned origin.

Effect of sequential heat and cold shocks on nuclear phenotypes of the blood-sucking insect, Panstrongylus megistus (Burmeister) (Hemiptera, Reduviidae)

Thermal shocks induce changes in the nuclear phenotypes that correspond to survival (heterochromatin decondensation, nuclear fusion) or death (apoptosis, necrosis) responses in the Malpighian tubules of Panstrongylus megistus. Since thermal tolerance increased survival and molting rate in this species following sequential shocks, we investigated whether changes in nuclear phenotypes accompanied the insect survival response to sequential thermal shocks. Fifth instar nymphs were subjected to a single heat (35 or 40°C, 1 h) or cold (5 or 0°C, 1 h) shock and then subjected to a second shock for 12 h at 40 or 0°C, respectively, after 8, 18, 24 and 72 h at 28°C (control temperature). As with specimen survival, sequential heat and cold shocks induced changes in frequency of the mentioned nuclear phenotypes although their patterns differed. The heat shock tolerance involved decrease in apoptosis simultaneous to increase in cell survival responses. Sequential cold shocks did not involve cell/nuclear fusion and even elicited increase in necrosis with advancing time after shocks. The temperatures of 40 and 0ºC were more effective than the temperatures of 35 and 5ºC in eliciting the heat and cold shock tolerances, respectively, as shown by cytological analysis of the nuclear phenotypes. It is concluded that different sequential thermal shocks can trigger different mechanisms of cellular protection against stress in P. megistus, favoring the insect to adapt to various ecotopes.

Predictable Life-Cycle Shocks, Income Risk and Consumption Inequality

Was the increase in income inequality in the US due to permanent shocks or merely to an increase in the variance of transitory shocks? The implications for consumption and welfare depend crucially on the answer to this question. We use CEX repeated cross-section data on consumption and income to decompose idiosyncratic changes in income into predictable life-cycle changes, transitory and permanent shocks and estimate the contribution of each to total inequality. Our model fits the joint evolution of consumption and income inequality well and delivers two main results. First, we find that permanent changes in income explain all of the increase in inequality in the 1980s and 90s. Second, we reconcile this finding with the fact that consumption inequality did not increase much over this period. Our results support the view that many permanent changes in income are predictable for consumers, even if they look unpredictable to the econometrician, consistent with models of heterogeneous income profiles.

The Labor Market Effects of Technology Shocks

We analyze the labor market effects of neutral and investment-specific technology shocks along the intensive margin (hours worked) and the extensive margin (unemployment). We characterize the dynamic response of unemployment in terms of the job separation and the job finding rate. Labor market adjustments occur along the extensive margin in response to neutral shocks, along the intensive margin in response to investment specific shocks. The job separation rate accounts for a major portion of the impact response of unemployment. Neutral shocks prompt a contemporaneous increase in unemployment because of a sharp rise in the separation rate. This is prolonged by a persistent fall in the job finding rate. Investment specific shocks rise employment and hours worked. Neutral shocks explain a substantial portion of the volatility of unemployment and output; investment specific shocks mainly explain hours worked volatility. This suggests that neutral progress is consistent with Schumpeterian creative destruction, while investment-specific progress operates as in a neoclassical growth model.