Extreme precipitation events have become more frequent and severe in recent years, leading to devastating natural disasters around the world. This paper investigates the impacts of extreme rainfall on corporate leverage dynamics. We find that the increase of extreme precipitation brings about a significant drop in firm’s leverage. The channel tests show that extreme rainfall would generate the recession of firm’s balance sheet and thus tighten the financing constraints, inducing firm to cut down leverage. On the other hand, intense rainfall would depress the land price and heighten local government’s debt risk, which crowds out the credit resources allocated to private sector, contributing to the deleveraging of firms. Simulations from the new Keynesian DSGE model with extreme rainfall shock and local government land finance system, lend further support to our empirical findings. Furthermore, our model shows that the welfare cost of extreme rainfall risk can amount to 2.2% of the agent’s lifetime utility. Lower welfare cost can be achieved by accommodating monetary policy and active fiscal policy.

This study explores the heterogeneous and asymmetric macro-financial effects of weather-related shocks in Central, Eastern and Southeastern European countries, depending on the level of underlying macro-financial vulnerabilities. Focusing solely on acute physical risks – those arising from extreme weather events – it employs panel quantile regression analysis to examine data from 2000Q1–2022Q4 for 17 countries in the region. Notably, we find that weather shocks – particularly droughts, floods, heatwaves and wildfires – exacerbate macroeconomic and financial imbalances, increasing the susceptibility of already vulnerable economies to additional risks. Specifically, countries with higher economic imbalances suffer more severe output disruptions and heightened inflationary pressures following a weather shock. While the immediate impact of climate shocks on external imbalances is limited, countries with existing vulnerabilities may still encounter longer-term pressures on trade and investment patterns. Additionally, extreme weather events can intensify financial vulnerabilities for countries that are already grappling with lower levels of financial resilience.

Using a Bayesian Global VAR model as a methodological tool, we analyze how heightened geopolitical risk shocks propagate across advanced economies and quantify the economic effects of these events. The global VAR impulse response functions in response to the skyrocketing Russian geopolitical risk after Russia’s invasion of Ukraine revealed a contraction of GDP and an increase in inflation. Eastern European and Baltic countries are particularly affected by the Russian geopolitical risk shock. We also document a strong component of the Russian geopolitical risk shock that is not driven by fossil fuel prices.

This paper examines how credit constraints shape the transmission of uncertainty shocks in business cycles. Standard models struggle to capture the simultaneous declines in output, consumption, investment, and labor hours during uncertainty spikes. We introduce collateral-based credit constraints for impatient households and entrepreneurs, linking their borrowing capacity to asset values. As uncertainty rises, higher risk premia reduce the demand for collateral assets, prompting impatient households to cut labor supply, leading to an output decline. Our model generates macroeconomic co-movements without relying on nominal rigidities. Lowering the loan-to-value (LTV) ratio, particularly for households, helps mitigate these adverse effects.

We introduce a banking sector and heterogeneous agents in the dynamic overlapping generations model of Matsuyama et al. (2016). Our model captures the benefits and costs of an advanced banking system. While it allocates resources to productive activities, it can also hinder progress if it invests in projects that do not contribute to capital formation, and potentially triggering instabilities due to the emergence of cycles. Our intergenerational dynamic framework enables us to show that income inequality between agents increases during recessions, confirming empirical observations. Moreover, we identify both changes in production factor prices and the reallocation of agents across occupations as driving factors behind the increased inequality.

I show that the defining features of the Great Moderation were a shift in output volatility toward medium-term fluctuations and a shift in the origin of those fluctuations from the real to the financial sector. I uncover a Granger-causal relationship whereby financial cycles attenuate short-term business cycle fluctuations while simultaneously amplifying longer-term fluctuations. As a result, financial shocks systematically drive medium-term output fluctuations, whereas real shocks drive short-term output fluctuations. I use these results to argue that the Great Moderation and Great Recession both resulted from the same economic forces. On the theoretical front, I show that long-run risk is a critical ingredient of DSGE models with financial sectors that seek to replicate these shifts. Finally, I use this DSGE model to refine the “good luck” and “good policy” hypotheses of the Great Moderation.

Scholars who have deliberated on trade union density decline have paid scant attention to the diminished importance of organised labour’s capacity to stabilise markets by harmonising wage growth and total factor productivity. We underscore the significance of this omission by documenting how interwar US scientific management theorists and practitioners enhanced unions’ ability to stabilise markets in an era of high productivity growth, and in so doing helped build union numbers and influence. We argue, moreover, that once the productivity wave ended, employers and the US state came to view unions as a source of stagflation, conflict, and inefficiency. This development was particularly pronounced in nations with adversarial pluralist industrial relations regimes rather than the democratic corporatist agenda advocated by Frederick Taylor and his acolytes. We conclude that in an era characterised by revitalised support for knowledge-intensive reindustrialisation, revisiting the scientific managers’ agenda might assist trade union renewal.

In this paper, we provide a detailed analytical treatment of the behavioral macroeconomic model by De Grauwe and Ji (2020 Structural reforms, animal spirits, and monetary policies. European Economic Review 124, 103395). Although the model’s dynamics is governed by a high-dimensional nonlinear law of motion, we are able to derive necessary and sufficient conditions for the local asymptotic stability of its fundamental steady state. Specifically, we find that under the authors’ baseline parameter setting, the fundamental steady state is locally asymptotically stable, implying that the dynamics of booms and busts only arise when exogenous shocks hit the system. However, we also identify conditions under which boom-bust dynamics emerge temporarily endogenously from within the model. By doing so, we may contribute to a deeper understanding of how booms and busts can arise in such a framework – insights that central banks can use to design more effective monetary policies.

This paper commemorates the 50th anniversary of the 1973 recession during Salvador Allende’s government by offering a comprehensive analysis of macroeconomic populism. Focusing on the lessons from this historical episode, it is argued that the lax economic policies in 1970 and 1971 triggered the boom of 1971, culminating in a financial crisis in 1972 and an economic recession in 1973. The examination encompasses an evaluation of Chilean macroeconomic populism, delving into the impact of these lax policies on the business cycle. Furthermore, it addresses prevalent misinterpretations of the 1973 recession in the context of recent Latin American events. The paper concludes by extrapolating broader insights from the Chilean experience, offering valuable lessons for shaping effective economic policies in Latin America.

This paper tests for the cyclical implications of the external constraint in Argentina from 1930 to 2018, and investigates the responses of GDP, real wages, trade balance, and external debt to external trade shocks using a recursive vector-autoregressive model. Moreover, considering the shift in development strategy in 1976, marked by the transition from state-led industrialization to deregulation and trade openness, changes in external vulnerability are analyzed.

Results confirm a trade balance bottleneck hindering future growth, and that external debt fails to spur short-term growth or improve the purchasing power of the population, thereby confirming the vicious cyclical dynamics of stop-and-go and go-and-crash for the entire period. Also, real external vulnerability grew significantly after 1976, as evidenced by the fact that the cumulative impact of movements in the terms of trade and external demand rose from explaining 30% to 43% of GDP variation.

This paper investigates the permanent effect on total factor productivity (TFP) of temporary shocks. We estimate a structural vector autoregression to test the predictions of endogenous growth models over the business cycle. According to theory, the stock of technological knowledge promotes its flow as researchers “stand on the shoulders of giants.” Therefore, if R&D investment is pro-cyclical—as data show and theory predicts—a recession leads to a temporary deviation of the R&D level from its trend, thus reducing new knowledge creation. The lost technological advancements cause the economy to follow a parallel but permanently lower growth path. Our findings align with the primary theoretical prediction. Quantitatively, the US economy forgoes approximately 1.3% in TFP following an increase in cyclical unemployment that peaks at 1 percentage point above the mean. The historical variance decomposition shows a strong positive effect during the boom of the late 1960s and strong negative effects around the Volcker disinflation period and the Great Recession. Finally, we estimate the effects on R&D of a TFP shock to differentiate between different explanations on how the R&D pro-cyclicality arises. Our results align with models where financial frictions or nominal rigidities drive it.

Using US quarterly data (1967–2023), including inflation’s post-pandemic surge and decline alongside monetary policies characterized by quantitative easing before refocusing on the 2% target, we utilize traditional and novel econometric tools to assess the stability of key macroeconomic variables’ responses to monetary shocks. Our findings confirm the relevance of a broad Divisia aggregate in understanding monetary policy transmission and highlight its empirical importance in explaining output and price dynamics across decades. Time-varying impulse response functions (IRFs) reveal consistent and puzzle-free price responses to Divisia-based monetary shocks throughout the sample, aligning with theory. Time-varying IRFs indicate that pandemic-related outliers in GDP (2020Q2) do not disrupt results. In contrast, Fed Funds rate or shadow policy interest rate shocks often yield puzzling outcomes across earlier and extended periods.

Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to demand and supply shocks under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with lower or higher weight on the unemployment gap. Across all rules, responding to unemployment leads to lower losses of employment. Responding to unemployment reduces cross-country differences within the monetary union and consumption inequality between rich and poor households within each country.

This paper presents and tests a simple model of competitive and unilateral market power regimes that yields countercyclical markups. Following a decrease in demand in the short run, capacity-constrained firms may have a strong incentive not to lower their prices to the new competitive price. Demand shocks may introduce market power into a previously competitive market. Experimental posted offer markets support this conjecture with complete information on the market structure. With only private information, there appears to be a hysteresis effect concerning supracompetitive prices, i.e., markets with a history of supracompetitive pricing continue to generate supracompetitive prices following demand shocks. However, competitive markets also remain competitive following demand shocks when firms only have private information on costs and capacities.

This study investigates the contribution of financial frictions in term premiums on long-term bonds within a production economy. We consider a New Keynesian model, featuring an agency problem between financial intermediaries and their private creditors and generalized recursive preferences. The model predicts that financial frictions that amplify the impact of structural shocks on key macroeconomic variables increase term premiums under our baseline calibration. Furthermore, financial frictions produce a larger term premium when monetary policy is geared toward output over inflation stability. The novel mechanism that financial frictions increase term premiums are associated with the bank balance sheet channel of monetary policy.

This study presents a simple frequency-dependent regime-switching vector autoregression (VAR) model, where each regime and its associated parameters in the VAR are characterized by their distinct spectral properties. Empirical applications to several key macroeconomic variables reveal clear frequency-dependent switching dynamics, with each regime exhibiting distinctive features regarding spectral properties, volatility, and impulse responses. We compare this model with a conventional regime-switching model (typically studied in the time domain) and highlight several key differences between the two approaches.

Recently, there has been a surge in interest in exploring how common macroeconomic factors impact different economic results. We propose a semiparametric dynamic panel model to analyze the impact of common regressors on the conditional distribution of the dependent variable (global output growth distribution in our case). Our model allows conditional mean, variance, and skewness to be influenced by common regressors, whose effects can be nonlinear and time-varying driven by contextual variables. By incorporating dynamic structures and individual unobserved heterogeneity, we propose a consistent two-step estimator and showcase its attractive theoretical and numerical properties. We apply our model to investigate the impact of US financial uncertainty on the global output growth distribution. We find that an increase in US financial uncertainty significantly shifts the output growth distribution leftward during periods of market pessimism. In contrast, during periods of market optimism, the increased uncertainty in the US financial markets expands the spread of the output growth distribution without a significant location change, indicating increased future uncertainty.

We investigate two findings in Gali and Monacelli (2016, American Economic Review): (i) the effectiveness of labor cost adjustments on employment is much smaller in a currency union and (ii) an increase in wage flexibility often reduces welfare, more likely in an economy that is part of a currency union. First, we introduce a distorted steady state into Gali and Monacelli’s small open economy model, in which employment subsidies making the steady state efficient are not available, and replicate their two findings. Second, an endogenous fiscal policy rule similar to that in Bohn (1998, Quarterly Journal of Economics) is introduced with a government budget constraint in the model. The results suggest that while Gali and Monacelli’s first finding is still applicable, their second finding is not necessarily valid. Therefore, an increase in wage flexibility may reduce welfare loss in an economy that is part of a currency union as long as wage rigidity is sufficiently high. Thus, there is scope to discuss how wage flexibility benefits currency unions.

In this study, we examine how local government debt responds to environmental policies in China. We show that when an environmental policy impacts the economy, local governments are likely to increase debt issuance, with this effect becoming stronger when local officials have greater career incentives within the Chinese bureaucratic system. Over-accumulation of local government debt, which leads to social welfare losses, is closely tied to the urgency local officials feel to secure promotions. Our analysis offers valuable insights for better coordination between fiscal and environmental policies.

This paper evaluates (i) the transmission of global uncertainty shocks to the expectations of professionals and disagreement among them and (ii) the relevance of policy choices in open economies in the context of the impossible trinity. Relying on a large set of survey data covering a wide range of expected macroeconomic outcomes for 33 countries, we establish evidence for an expectation channel of global uncertainty shocks. Global uncertainty exerts significant and adverse effects on expectations over domestic macroeconomic outcomes across the board and also frequently spills over to disagreement over these outcomes, increasing domestic uncertainty. Finally, we identify nonlinear relationships between the policy choices in an open economy and the transmission of uncertainty shocks. Policy choices affect the expected downswing in GDP in the aftermath of uncertainty shocks, the expected response of monetary policy, and the exchange rate and disagreement over future macroeconomic outcomes.