Abstract We estimate the direct and indirect effects of clean energy investment on carbon emissions using a Spatial Durbin Model fitted to a panel of 72 countries from 2000 to 2018. We find that a 1 percent increase in domestic clean energy investment reduces domestic carbon emissions by approximately 0.05 percent on average, controlling for country characteristics. However, this benefit is offset by a carbon leakage effect, whereby a 1 percent increase in clean energy investment among neighboring countries leads to about a 0.28 percent increase in domestic carbon emissions. This is suggestive of the outsourcing of pollution from one country to another and indicates that ad hoc policies to promote clean energy investment may be ineffective in achieving global emissions abatement. We conclude that a coordinated international policy framework is required to prevent jurisdiction-shopping by polluters. Keywords: Clean energy investment, CO2 emissions, carbon leakage effect, spatial Durbin model. JEL Codes: C13, C23, Q54 Full text

Abstract We provide new evidence of sign asymmetry in dividend payout policy in the postwar period in the U.S. Using a nonlinear autoregressive distributed lag model, we show that managers: (i) smooth the time-path of dividends relative to earnings; (ii) target a higher long-run payout ratio when earnings increase than when they decrease; and (iii) cut dividends faster than they raise dividends. Our findings are consistent with existing research on the implications of agency problems and signaling effects for payout policy. Keywords: Payout policy, dividend-smoothing, sign-asymmetry, two-step estimation. JEL Codes: C22, C58, G35 Full text

Abstract We develop an empirical network model to characterize the density of bilateral sovereign credit risk spillovers during the European debt crisis. We show that the spillover density is often asymmetric with heavy tails and that its location and shape vary strongly and systematically in relation to published indicators of systemic stress. Using auxiliary panel data models, we show that the intensity of bilateral spillovers is related to the portfolio investment exposures among country pairs. Because our spillover statistics can be updated daily, they represent a valuable supplement to existing weekly and monthly measures of systemic stress. Keywords: Sovereign credit risk network, credit default swaps (CDS), contagion and systemic stress, network models and connectedness, spillover density. JEL Codes: C58, F45, G15, H63 Full text

Abstract We review the literature on the autoregressive distributed lag (ARDL) model, from its origins in the analysis of autocorrelated trend stationary processes to its subsequent applications in the analysis of cointegrated non-stationary time series. We then survey several recent extensions of the ARDL model, including asymmetric and non-linear generalisations of the ARDL model, the quantile ARDL model, the pooled mean group dynamic panel data model and the spatio-temporal ARDL model. Keywords: Autoregressive Distributed Lag (ARDL) Model; Asymmetry, Nonlinearity and Threshold Effects; Quantile Regression; Panel Data; Spatial Analysis. JEL Codes: C22. Full text

Abstract We develop a new technique to estimate vector autoregressions with a common factor error structure by quantile regression. We apply our technique to study credit risk spillovers among a panel of 17 sovereigns and their respective financial sectors between January 2006 and December 2017. We show that idiosyncratic credit risk shocks propagate much more strongly in both tails than at the conditional mean or median. Furthermore, we develop a measure of the relative spillover intensity in the right and left tails of the conditional distribution that provides a timely aggregate measure of systemic financial fragility and that can be used for risk management and monitoring purposes. Keywords: Network modelling; Quantile vector autoregression with common factors; quantile connectedness; financial–sovereign credit risk transmission; tail-dependence. JEL Codes: C31, C32, C58, E44, G01. Full text

Abstract We apply techniques from the event probability forecasting literature to the analysis of spillover scenarios in economic and financial networks. A simple spillover scenario is expressed as an inequality constraint with respect to a single spillover measure. More complex spillover scenarios can be defined as combinations of simple scenarios. The scenario probabilities are evaluated using a non-parametric bootstrap. We use our technique to study credit risk transmission among a group of eighteen countries over the 2006-2010 period. We show that abrupt changes in the probabilities of `crisis scenarios' accurately map on to key events during the global financial crisis. Keywords: Empirical network model, Non-parametric bootstrap, Credit risk transmission, Probabilistic scenario analysis, Probabilistic classification. JEL Codes: C32, C58, G01. Full text

Abstract We study the distribution of equity returns in the G20 equity markets to test for contagion following the first official report of a COVID-19 case in China in December 2019 and the subsequent announcement of a global pandemic in March 2020. We find evidence of contagion of Chinese equity market tail risk in early 2020 followed by widespread evidence of contagion across multiple channels from the U.S. to G20 equity markets after the pandemic announcement. Our results suggest that global equity markets may be exposed to unpriced pandemic risk factors with implications for portfolio diversification, risk management and financial stability. Keywords: Financial contagion, Comoment contagion tests. JEL Codes: C32, E31, E32. CAMA Working Paper: Full text Full text

Abstract We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate detrimental spillovers for the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific government bailouts for troubled financial sectors. Keywords: Financial sector bailouts; sovereign risk shocks; international spillovers; structural shocks; sign restrictions. JEL Codes: C58, E61, F42, G01. Full text

Abstract We develop a technique to exploit forecast error variance decompositions to evaluate the macroeconomic connectedness embedded in any multi-country macroeconomic model with an approximate vector autoregressive (VAR) representation. We apply our technique to a large global VAR model covering 25 countries and derive vivid representations of macroeconomic connectedness. The US, the Eurozone and the crude oil market exert a dominant influence in the global economy, while the Chinese and Brazilian economies are also globally significant. Recursive analysis over the period of the global financial crisis shows that shocks to global equity markets are rapidly and forcefully transmitted to real trade flows and real GDP. Keywords: Generalized Connectedness Measures (GCMs), international linkages, network analysis, macroeconomic connectedness, forecast error variance decomposition. JEL Codes: C32, C53, E17. SSRN: 2015 working paper version Full text

Abstract We develop an empirical network model to study credit risk spillovers among a group of eighteen sovereigns and their financial sectors from 2006-2015. Initially a net source of credit risk, the financial sector becomes a net recipient after the 2008 financial sector bailouts in many countries. Fiscal fundamentals explain much of the heterogeneity in financial-sovereign spillovers over this period. The subsequent European sovereign bailouts disrupt the feedback between sovereign risk and local financial sector risk. Depending on the initial fiscal position of the target country, sovereign bailouts may also disrupt international credit risk spillovers originating from the target sovereign. Keywords: Financial Crisis; Debt Crisis; Financial–Sovereign Linkages; Credit Risk Transmission; Network Modelling. JEL Codes: C58, E44, G01, G12. Full text

Abstract We develop a global vector autoregressive model to study the transmission of information between currency spot markets. Our model accounts for both simultaneous and dynamic interactions between exchange rates and order flows using historical data from the Reuters Dealing 2000-1 platform for the period May--August 1996. By analysing the network topography of the system, we find that currency markets are intricately linked and that the Deutsche Mark and the Yen exert a leading influence over the European currencies. Furthermore, using a novel technique we find that the Yen and Sterling act as safe haven currencies. Keywords: Exchange Rates, Order Flows, Global VAR, Connectedness and Spillovers, Safe Haven Currency. JEL Codes: C32, C51, F31, G15. SSRN: http://ssrn.com/abstract=2443243 Full text       Replication Files (Gauss)

Abstract This article considers the issue of data cleaning. We use state-level data on internet search activity in the US to illustrate several common data cleaning tasks, including frequency conversion and data scaling as well as methods for handling sampling uncertainty and accommodating structural breaks and outliers. We emphasise that data cleaning relies on informed judgment and so it is important to maintain transparency through careful documentation of data cleaning procedures. Full text

Abstract We analyse exchange rate pass-through into import prices for a large group of 33 emerging and developed economies from 1980Q1 to 2010Q4. Our error correction models permit asymmetric pass-through for currency appreciations and depreciations over three horizons of interest:\ on impact, in the short run and in the long run. We find that depreciations are typically passed-through more strongly than appreciations in the long-run, suggesting that exporters may exert a degree of long-run pricing power. This asymmetry is stronger in economies which are more import dependent but is moderated by freedom to trade and a positive output gap. Given that this pass-through asymmetry is welfare-reducing for consumers in the destination market, a key macroeconomic implication is that import-dependent economies, in particular, can benefit from trade liberalisation. Keywords: Exchange Rate Pass-Through; Asymmetry; Nonlinear ARDL Model; Random Coefficients Panel Data Model; Emerging Markets. JEL Codes: F10; F30; F14; F31. SSRN: http://ssrn.com/abstract=2365275 Full text

Abstract We study spillovers among daily returns and innovations in option-implied risk-neutral volatility and skewness of the G10 currencies. An empirical network model uncovers substantial time variation in the interaction of risk measures and returns, both within and between currencies. We find that aggregate spillover intensity is countercyclical with respect to the federal funds rate and increases in periods of financial stress. During these times, volatility spillovers and especially skewness spillovers between currencies increase, reflecting greater systematic risk. Likewise, linkages between returns and risk measures strengthen in times of stress, with returns becoming more sensitive to risk measures and vice versa. Keywords: Foreign exchange markets, risk-neutral volatility, risk-neutral skewness, spillovers, coordinated crash risk. JEL Codes: C58, F31, G01, G15. SSRN: http://ssrn.com/abstract=2730957 Full text (including link to technical supplement)

Abstract This paper examines the implications of monetary shocks and macroprudential shocks for aggregate financial fragility using a sign restricted VAR model estimated with US data spanning the period 1960Q1–2007Q4. Contractionary monetary shocks are found to exacerbate financial fragility, increasing both the credit to GDP ratio and the ‘financial ratio’, which is the ratio of firms' debts to their internal funds. By contrast, when interest rates are fixed, credit-constraining macroprudential shocks may be able to reduce the credit to GDP ratio in the short run but are not able to reduce the financial ratio. However, when the interest rate is free to accommodate the macroprudential shock, both the credit to GDP ratio and the financial ratio decline, indicating a reduction of financial fragility and suggesting that there may be gains from a coordinated approach to macroeconomic management. Keywords: Financial Stability; Monetary Policy; Macroprudential Policy; Sign Restrictions. JEL Codes: C32, C51, C54. Full text

Abstract This paper develops a simple two-country stock-flow consistent model based on that of Godley and Lavoie (2007). In order to motivate the use of stabilisation policies, persistent inflationary pressure and endogenous economic cycles are introduced into the model. Three scenarios are then simulated: a step decrease in real exports from country B, increased wage pressure in country B and an income tax cut in country A. In all cases, monetary and fiscal policies in isolation enjoy little success but a combined monetary and fiscal approach to stabilisation proves highly effective. Moreover, the model suggests that the pursuit of autonomous inflation targeting in each country introduces excessive exchange rate volatility relative to an alternative rule in which one central bank takes a leading role in interest rate setting. Keywords: Open Economy, Stock-Flow Consistency, Inflation Targeting, Interaction of Monetary and Fiscal Policies. JEL Codes: E61, E63, F41. SSRN: http://ssrn.com/abstract=2104255 Full text       Technical Annex       Programmes (Eviews)

Abstract This paper develops a cointegrating nonlinear autoregressive distributed lag (NARDL) model in which short- and long-run nonlinearities are introduced via positive and negative partial sum decompositions of the explanatory variables. We demonstrate that the model is estimable by OLS and that reliable long-run inference can be achieved by bounds-testing regardless of the integration orders of the variables. Furthermore, we derive asymmetric dynamic multipliers that graphically depict the traverse between the short- and the long-run. The salient features of the model are illustrated using the example of the nonlinear unemployment-output relationship in the US, Canada and Japan. Keywords: Asymmetric Cointegrating Relationships, Asymmetric Dynamic Multipliers, Nonlinear ARDL (NARDL) ECM-based Estimation and Tests, Nonlinear Unemployment-Output Relationship. JEL Codes: C12, C13, J64. SSRN: http://ssrn.com/abstract=1807745 Full text       Data       EViews implementation       R Toolbox (by R. van Jaarsveld)       Multipliers - Gretl (by A. Tarassow)       Multipliers - Stata ver. 2 (by M. Sunder)

Abstract This paper investigates the adjustment of the prices of four key petroleum products in the UK following changes in the price of crude oil. We find significant evidence that the pre-tax prices of diesel, kerosene and gas oil adjust more rapidly in an upward than a downward direction but that the pre-tax price of unleaded petrol adjusts symmetrically. However, these patterns are obscured at the pump once one accounts for fuel duty and value added tax, raising the possibility that firms can use the tax system to conceal rent seeking behaviour. Keywords: Nonlinear ARDL (NARDL), Asymmetric Gasoline Price Adjustment, Rockets and Feathers Hypothesis. JEL Codes: C22, H23, Q40. SSRN: http://ssrn.com/abstract=2278643 Full text

Abstract We investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross-sectional distribution of relative prices using a modified Calvo pricing model with regime-dependent price rigidities. Calibration experiments reveal that the inflation-standard deviation and inflation-skewness relationships exhibit U-shaped asymmetries around the historical mean inflation rate. UK sectoral data supports our results. We conclude that monetary policy should target an inflation rate proximate to the (common) minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments. Keywords: Inflation, Regime-Dependent Price Rigidity, Sectoral Heterogeneity, UK. JEL Codes: E31, E52. SSRN: http://ssrn.com/abstract=1880192 Full text       Data       Programmes (Gauss/Stata)       Readme

Abstract This chapter demonstrates the usefulness of the GVAR modelling framework as a tool for scenario-based forecasting and counterfactual analysis. Working with the GVAR model developed by Greenwood-Nimmo, Nguyen and Shin (2010, J. Appl. Econometrics), we first show how probabilistic forecasting can be applied to the analysis of global imbalances. Probabilistic forecasting involves evaluating the conditional probability that a given event or combination of events will occur over a defined horizon by means of model-based simulations. To illustrate the usefulness of this approach, we develop a simple four-way probabilistic classificatory system built around the notions of balancing improvement in the trade balance, unbalancing improvement, balancing deterioration and unbalancing deterioration. We then extend a similar approach in a counterfactual context by constructing a range of scenarios as linear combinations of generalised impulse responses. We conclude that GVAR models are particularly well-suited to scenario-based analyses such as ours as they have the potential to analyse singularly rich datasets that allow the modeller to construct a wide range of policy-relevant scenarios. Keywords: Global VAR, Scenario-Based Forecasting and Analysis, Global Imbalances. JEL Codes: C32, C53, E17. SSRN: http://ssrn.com/abstract=2026984 Full text       Data       Programmes (Gauss)

Abstract This paper analyses the international linkages of the Korean economy using the GVAR model developed by Greenwood-Nimmo, Nguyen and Shin (2012a, J. Appl. Econometrics). By employing a combination of generalised impulse response analysis and forecast error variance decompositions, we uncover a number of interesting phenomena. Among our most important results are the findings that the real economy and the financial markets are highly sensitive to the oil price even though it has little effect on inflation and that the interest rate is set largely without recourse to overseas conditions except to the extent that they are captured by the exchange rate. We find that the dominant sources of overseas influence on the Korean economy are the US, the Eurozone, Japan and China. Korea's complex and open linkages with these countries will inevitably pose challenges for domestic economic management and stabilisation policy faced by the Korean monetary and fiscal authorities. Keywords: Global VAR, Impulse Response Analysis, Forecast Error Variance Decomposition, Korean Macroeconomic International Linkages. JEL Codes: C32, C53, E17. SSRN: http://ssrn.com/abstract=2136849 Full text       Data       Programme (Gauss)

Abstract We apply a global vector autoregressive (GVAR) model to the analysis of inflation, output growth and global imbalances among a group of 33 countries (26 regions). We account for structural instability by use of country-specific intercept shifts, the timings of which are identified taking into account both statistical evidence and our knowledge of historic economic conditions and events. Using this model, we compute both central forecasts and scenario-based probabilistic forecasts for a range of events of interest, including the sign and trajectory of the balance of trade, the achievement of a short-term inflation target, and the incidence of recession and slow growth. The forecasting performance of the GVAR model in relation to the ongoing financial crisis is quite remarkable. It correctly identifies a pronounced and widespread economic contraction accompanied by a marked shift in the net trade balance of the Eurozone and Japan. Moreover, this promising out-of-sample forecasting performance is substantiated by a raft of statistical tests which indicate that the predictive accuracy of the GVAR model is broadly comparable to that of standard benchmark models over short horizons and superior over longer horizons. Hence we conclude that GVAR models may be a useful forecasting tool for institutions operating at both the national and supra-national levels. Keywords: GVAR Modelling, Structural Breaks, Probability Event Forecasting and Evaluation, Global Imbalances. JEL Codes: C32, C53, E17. Full text       Statistical Annex       Data       Programmes (Gauss)

Abstract Minsky\92s contention that stability is destabilising has profound implications for the conduct of stabilisation policy. The pursuit of price stability by central banks rests on the assumption that (price-level) stability begets financial stability (c.f. Schwarz, 1988; 1998). However, the Schwarz Hypothesis has been violated in recent years by the increasing incidence and severity of financial bubbles during the most remarkable period of prolonged economic stability in recent memory. Using an uncontroversial two-step estimation procedure, this paper demonstrates that periods of stability variously defined have led to increased corporate leveraging in the US since the 1970s. If one accepts that a firm\92s ability to service its debts decreases as the ratio of debts to income increases ceteris paribus, the results provide strong support for the Minskyan view. Keywords: Financial Instability Hypothesis, conditional volatility, stabilisation policy. JEL Codes: E32, E44, E52. Full text       Data       Programme (Eviews)