Fiscal deficits and the socioeconomic consequences of rebalancing: Insights from a TVP‐VAR with stochastic volatility

This article connects two salient economic features: (i) Fiscal shocks have asymmetric effects across business cycle phases (Gechert, Horn, & Paetz, 2019);(ii) the unemployment‐output trade‐off is time varying and may be unstable. The intertwined dynamic behaviour of fiscal deficit shocks and the unemployment‐output trade‐off is studied in this article using a time‐varying parameter (TVP) vector autoregression (VAR) with stochastic volatility techniques applied to the analysis of data from Canada, France, Germany, Japan, Spain, Sweden, United Kingdom and the United States of America. We confirm the trade‐off heterogeneity across country, and its time‐varying nature across time, showing in addition its fluctuation around a long‐run reference value. We document significant short‐run impacts of fiscal shocks on the unemployment‐output trade‐off which, based on the experience of the Global Financial Crisis, becomes larger in periods of economic turmoil. Policy‐wise, the rebalancing of public finances may have unexpected adverse effects on job creation if implemented during slumps, precisely when the labour market sensitivity with respect to the performance of the product market is likely to be more acute. This message is particularly relevant in the aftermath of the Covid‐19 pandemic.

Uncertainty before and during COVID-19: A survey.

This survey features three parts. The first one reviews the most recent literature on the relationship between domestic (i.e., country-specific) uncertainty and the business cycle, and offers ten main takeaways. The second part surveys contributions to the fast-growing strand of the literature that focuses on the macroeconomic effects of uncertainty spillovers and global uncertainty. The last part presents contributions on the role played by uncertainty during the COVID-19 pandemic.

US weekly economic index: Replication and extension

We revisit the US weekly economic index (WEI) put forth by Lewis, Mertens, Stock and Trivedi (2021). In a narrow sense, we replicate their main results with data gathered from its original sources. In a wide sense, we apply the methodology established in Wegmüller, Glocker and Guggia (2023) to adjust the weekly input series for seasonal patterns, calendar day effects, and excess volatility. In a long sense, we show that our proposed data adjustment significantly improves the nowcasting performance of the WEI. © 2023 John Wiley & Sons, Ltd.

Business Cycle Asymmetry and Input-Output Structure: The Role of Firm-to-Firm Networks

We study the network origins of business cycle asymmetries using cross-country and administrative firm-level data. At the country level, we document that countries with a larger number of non-zero intersectoral linkages (denser networks) display a more negatively skewed cyclical component of output. At the firm level, we find that firms with a larger number of suppliers and customers (degrees) display a more negatively-skewed distribution of their output growth. To rationalize these findings, we construct a multisector model with input-output linkages and show that the relationship between output skewness and network density naturally arises once we consider non-linearities in production. In an economy with low production flexibility (inputs are gross complements), denser production structures imply that relying on more inputs becomes a risk that further amplifies the effects of negative productivity shocks. The opposite holds if firms display high production flexibility (inputs are gross substitutes): having more inputs to choose from becomes an opportunity to diversify the effects of negative productivity shocks. We calibrate the model using our rich firm-to-firm network Chilean data and show that more connected firms experience larger declines in output in response to a COVID-19 shock, consistent with the data. We also show that, as in the data, the cross-sectional distribution of output growth in the model displays a fatter left tail during downturns. The previous result is shaped by the interplay between production complementarities and network interconnectedness, rather than by the asymmetry of the shocks. The size of the shock determines the strength of the relationship between degrees and output decline, which highlights the importance of non-linearities and the limitations of local approximations.

Research on Diversification Strategies of Terminal Operators—Evidence from Polish Seaports

In response to changes taking place in the global environment, seaport terminal operators constantly search for lines of development in their operations, choosing i.a. a strategy of diversification or specialisation. So far, the issue of applying a diversification strategy in business models used by operators of multipurpose terminals has not been sufficiently addressed in the literature on the subject. In view of the above, the purpose of this paper is to identify and hierarchize the motivations for diversification and to specify the areas of diversification strategies and corresponding measures taken by operators of multipurpose terminals. The multi-case-study method was applied to conduct the research, along with the research technique of semi-structured in-depth interviews held with representatives of five terminal operators that had been running their business activity in Polish seaports and applying a diversification strategy. As a result of the completed research study, it was possible to specify the motivations for implementing a diversification strategy, and to hierarchize them. The main motives in selecting a diversification strategy as the main business strategy among the interviewed terminal operators were safeguarding against seasonal or sporadic business cycle fluctuations, and changes taking place in maritime trade and transport. Moreover, four areas of diversification strategies pursued by the terminal operators were identified: cargo diversification, contract diversification, services diversification, and cargo flow direction diversification. The diversification measures taken by the terminal operators in the specified areas were analysed in detail. The most important areas of the diversification measures in the studied entities were cargo diversification and services diversification. A heat map was developed to present the dependencies between the motivations for diversification and the areas of diversification strategies implemented by the terminal operators. The identified specific measures taken by the terminal operators as part of the indicated diversification areas included technical and organisational measures. The diversification strategy developed by terminal operators proved to be an effective strategy in coping with the effects of economic slowdown and disruptions ensuing from the COVID-19 pandemic and war in Ukraine. The results of the considerations may be of interest to seaports, transshipment terminals or other entities interested in implementation of a business activity diversification strategy. © 2023 by the authors.

Global Confidence, Uncertainty, and Business Cycles

This paper investigates the role of global confidence cycles, measured as the common factor across a wide range of survey-based business or consumer confidence indicators in global macroeconomic fluctuations over 1985–2019. We estimate a factor-augmented vector autoregression model, where global confidence shocks are identified through recursive restrictions. We report three main results. First, the global confidence cycles—in particular, that of consumer confidence—have played a key role in global business cycle fluctuations, explaining over a third of total variations. Second, while global business confidence shocks are in nature demand driven, global consumer confidence seems to reflect both demand and supply shocks, in line with "animal spirit” and "news” views on the relationship between confidence and economic activities. Third, the shifts in global confidence are not necessarily accounted for by uncertainty shocks. Instead, confidence acts as an important channel in the transmission of uncertainty shocks. The results are robust to alternative identification using a novel set of external instruments, alternative variable orderings, and different uncertainty measures. © 2023, European Central Bank. All rights reserved.

Synchronization without similarity. The effects of COVID-19 pandemic on GDP growth and inflation in the Eurozone

As the European Central Bank implements a common monetary policy for all member states, the effectiveness of the policy hinges upon the synchronization and similarity of inflation and GDP growth between them. We examine the consequences of COVID-19 outbreak for GDP growth and inflation of the Eurozone countries. We find that business cycles have been diverging since the aftermath of the Financial Crisis;however, the outbreak of COVID-19 brought about synchronization on a record scale. However, this increase in comovement is accompanied by an increase in the dissimilarity in the rates of GDP growth. Ergo, synchronization without similarity.

Did the policy responses influence credit and business cycle co-movement during the COVID-19 crisis? Evidence from Indonesia.

This paper examines the responses of credit and business cycle to various policy actions of the Government of Indonesia during the COVID-19 crisis. Specifically, the paper addresses two key questions (1) How do the credit and business cycle behave during the COVID-19 crisis in Indonesia? (2) Do the central bank and government policy responses effectively stabilize the credit and business cycle? Using the concordance Index and DCC-GARCH methodology, we found that the COVID-19 crisis increased Indonesia's credit and business cycle co-movements. Similarly, using the mixed data sampling regression technique, our findings suggest fiscal policy measures and government support help the business cycle revival during the COVID-19 pandemic. However, the monetary policy transmission is weak during the pandemic.

Coherence of output gaps in the euro area: The impact of the COVID-19 shock.

Using the measures proposed by Mink et al. (2012), we reexamine the coherence of business cycles in the euro area using a long sample period. We also analyze the impact of the COVID-19 pandemic on business cycle coherence and examine whether our measures for business cycle coherence indicate a core versus periphery within EMU. Our results suggest that business cycle coherence did not increase monotonically. The COVID-19 pandemic made that the signs of the output gaps of euro area countries became more similar, but we find large differences in the amplitude of the output gaps across countries.

From epidemic to pandemic: Effects of the COVID-19 outbreak on high school program choices in Sweden.

We study whether the onset of the COVID-19 crisis affected the program choices of high school applicants in Sweden. Our analysis exploits the fact that the admission process consists of two stages: a preliminary round in which applicants initially rank programs in order of preference and a final round in which they can alter their preliminary rankings. In 2020, the timing of the two rounds happened to provide a unique pre- and post-crisis snapshot of applicants' field-of-study choices. Using school-level data on applicants' top-ranked programs for all admission rounds between 2016 and 2020, we implement a difference-in-differences method to identify the immediate effect of the crisis on demand for programs. We find no change in demand for academic programs, but a decline in top-ranked applications to some of the vocational programs. The declines are most pronounced and robust for programs related to the Accommodation and Food Services sector, which was the most adversely affected industry during the crisis. This finding suggests that labor market considerations influence the study choices made by relatively young students.

Weekly economic activity: Measurement and informational content

We construct a composite index to measure the real activity of the Swiss economy on a weekly frequency. The index is based on a novel high-frequency data set capturing economic activity across distinct dimensions over a long time horizon. We propose a six-step procedure for extracting precise business cycle signals from the raw data. By means of a real-time evaluation, we highlight the importance of our proposed adjustment procedure: (i) our weekly index significantly outperforms a comparable index without adjusted input variables;and (ii) the weekly index outperforms established monthly indicators in nowcasting GDP growth. These insights should help improve other recently developed high-frequency indicators. © 2021 International Institute of Forecasters

Multiplier effects of social protection: a SVAR approach for Brazil

Based on a Structural VAR approach, we estimated fiscal multipliers for social benefits in Brazil for 1997–2018. Our results suggest that social benefits have relatively large multiplier effects, even when compared to public investment. The multipliers are also larger in the full sample, which includes the country's 2014–16 economic crisis than in the period 1997–2014. In particular, our results show that spending one unit on social expenditures generates a final change in GDP of almost three after two years. The higher estimated multipliers in the full sample appear in the response of household consumption and private investment to shocks in total social expenditures and for different types of social benefits (e.g. cash transfers, unemployment insurance, and pensions). In a context in which the expansion of social protection became prominent as a response to structural changes in the labor market and the Covid-19 pandemic, our paper reinforces its potential role in the short-run economic recovery. © 2022 Informa UK Limited, trading as Taylor & Francis Group.

Quantifying the probability of a recession in selected Central and Eastern European countries

The COVID-19 pandemic simultaneously affected most economic sectors and has already caused severe worldwide social and economic damage. In response, authorities introduced social distancing measures, with an adverse impact on economic activity. If policymakers were aware of the existing vulnerabilities, including those derived from the positioning on the business cycle, resilience could have been increased. The aim of this article is to describe various methods of dating business cycles in several Central and Eastern European (C.E.E.) countries, namely Czechia, Hungary, Poland and Romania. Furthermore, a Probit model regarding the probability of a recession is estimated, confirming the adverse effects of the pandemic, in contrast with a brightening outlook given vaccination campaigns and the E.U. recovery package. However, in case of the Romanian economy, an in-sample estimation showed a high probability of negative growth rates even in a pre-pandemic world, due to the high macroeconomic imbalances. © 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.

Recessions and flattening of the yield curve (1960–2021): A two-way road under a regime switching approach

The one-way relationship that goes from the term spread to recessions has been widely studied. However, the relationship between term spread and the business cycle, in addition to being bidirectional, is conditioned by the cyclical phase itself. To demonstrate this, we have modelled the bidirectional relationship between term spread and the business cycle by extracting two interrelated latent Markov variables: the first, drawn from four activity indicators, replicates the phases of the US business cycle;the second, from the term spread of the yield curve, identifies two regimes: an ordinary regime (positive slope) and a flattening regime. By analyzing both the transition between these regimes and forecasted probabilities, we find that this bidirectional relationship is not symmetrical. That is, the term spread signals a change in the business cycle regime while the cyclical factor only signals the beginning of the ordinary regime of the term spread, not its ending. To illustrate the model, we confirm the beginning of the COVID-19 recession in March of 2020, and the corresponding start of the ordinary regime in the term spread. © 2022 The Author

Forecasting Spanish economic activity in times of COVID-19 by means of the RT-LEI and machine learning techniques

The main aim of this paper is to analyse and estimate the behaviour of the Spanish economic activity in the next 12 months, by means of a Real-Time Leading Economic Indicator (RT-LEI), based on Google Trends, and the real GDP. We apply methodologies based on fractional integration and cointegration to measure the degree of persistence and to examine the long-term relationship. Finally, we carry out a forecast using a Machine Learning model based on an Artificial Neural Network. Our results indicate that the Spanish economy will experience a contraction in 1Q-21 and will require strong measures to reverse the situation and recover the original trend.

Economic and behavioral determinants of forced household savings during the COVID-19 pandemic.

This study seeks to identify the determinants of forced household savings in 16 European Union (EU) member states in 2020. We show that the higher the severity of the COVID-19 pandemic in the state, measured by the intensity of government restrictions or the number of COVID-19-related deaths, the higher the level of forced savings. Such savings also increased with gross domestic product per capita and the financial support provided for households and enterprises by the government. Additionally, savings cultures and personality traits that support compliance with pandemic-related restrictions and enhance coping with the hardship of the pandemic had a positive impact on forced savings. Our results show that while common pandemic shock may lead to discrepancies in forced savings in affected countries, their level depends largely on government response in the form of imposed restrictions as well as financial support for households and enterprises. Therefore, strong fiscal support during the pandemic can be likened to sowing the seeds for post-pandemic recovery, as savings accumulated during the pandemic shock may be used to finance the pent-up demand. This, in turn, suggests that fiscal responses during the pandemic may act as a significant driver of post-pandemic business cycle (de)synchronization and inflation differentials among EU member states and, more importantly, euro-area countries.

Electoral Politics of Disaster: how earthquake and pandemic relief was used to earn votes

Disasters can be good for incumbent governments. Amidst an emergency, budgets can be revised and reallocated in a hurry, framing the government as a 'saviour,' issuing contracts to the government's business clientele and/or prioritising the electoral base more than the victims. Thus elected officials can curry favour with voters and increase their chances of retaining their seats. We examine this claim in the context of Albania, a middle-income country with weak public institutions. We show that the relief for two calamities, a destructive earthquake in 2019 and the Covid-19 pandemic, was used by the government to mobilise votes, thereby increasing the likelihood of electoral success in 2021. Both earthquake relief funding and Covid-19 vaccination rates spiked right before the elections only to drop soon afterwards. This phenomenon, known as the Electoral Politics of Disaster (EPD), poses a risk for the national economy, public health, spatial planning and democracy.

Recessions and flattening of the yield curve (1960-2021): a two-way road under a regime switching approach

The one-way relationship that goes from the term spread to recessions has been widely studied. However, the relationship between term spread and the business cycle, in addition to being bidirectional, is conditioned by the cyclical phase itself. To demonstrate this, we have modelled the bidirectional relationship between term spread and the business cycle by extracting two interrelated latent Markov variables: the first, drawn from four activity indicators, replicates the phases of the US business cycle;the second, from the term spread of the yield curve, identifies two regimes: an ordinary regime (positive slope) and a flattening regime. By analyzing both the transition between these regimes and forecasted probabilities, we find that this bidirectional relationship is not symmetrical. That is, the term spread signals a change in the business cycle regime while the cyclical factor only signals the beginning of the ordinary regime of the term spread, not its ending. To illustrate the model, we confirm the beginning of the COVID-19 recession in March of 2020, and the corresponding start of the ordinary regime in the term spread.

Michal Kalecki's Scientific Legacy as a Model for Understanding Contemporary Crises

Recurring crises slowing down economic activities and the resulting consequences paint the picture of modern economies. Therefore, it seems justified to draw on the achievements of economics with a view to explaining the causes of socio-economic crises. The article uses a descriptive method. The objective of the article is to understand the substance of the phenomenon;therefore, the author seeks certain analogies in the past and refers to the work of the Polish scholar Michal Kalecki. The basic conclusion of the article is: J.M. Keynes built a new macroeconomic theory based on the fundamental proposition that manufacturers' supply (the levels of national income and employment) depended on aggregate demand. In the mid-1930s, a similar thought was formulated by Poland's most eminent economist, Michal Kalecki. He constructed his business cycle model based on the aforementioned fundamental proposition. It meant that profits and national income were determined by effective investor and consumer demand. J.M. Keynes's and M. Kalecki's stressing the pivotal role of aggregate demand was a revolution in economic thinking. It should be noted that the COVID-19 pandemic is not merely a short-term change in economic activity. As predicted by various international institutions, it will have a lasting impact on the functioning of the global economy.

SHAPING THE PHENOMENA

The current expression of “flatten the curve” has similarities with mid-twentieth century macro-economic policy that can aptly be characterized as “shaping macro phenomena.” To the extent these similarities hold, the historical-epistemological analysis of this kind of macro-economic policy can provides us with a better understanding of the preconditions for the effectiveness of the current COVID-19 flatten-the-curve policy. Policy in terms of shaping a phenomenon presumes that the phenomenon in question exists and has a certain shape that can be moulded. This moulding, however, is not assumed to be performed directly on the shape itself, but by operating the mechanism that generates this shape, and which is also believed to exist. Therefore the precondition for this kind of policy is knowing the mechanism at work. The knowledge of this kind of intervention needed to change the shape in a desired direction, this knowledge about the mechanism, is assumed to be captured by a mathematical model on which several policies can be tried out to see which one leads to the desired shape. Mid-twentieth century macro-economic policy aimed at shaping the business cycle, and hence was based on the belief in the existence of a business cycle mechanism. With the loss of the belief in the existence of such a mechanism, the policy of shaping the business cycle disappeared with that too. This paper unpacks this history and shows how this policy based on mechanical reasoning, which originated in natural science, was gradually replaced by an approach that takes into account non-natural aspects of human behaviour. © 2022 by the authors.