Oil Price Shocks, Macroeconomics Stability and Welfare in a Small Open Economy

Since the beginning of 2000s the world economy has witnessed a sub-stantial increase in oil prices, which is seen to be an important source of economic fluctuations, causing high inflation, unemployment and low or negative growth rates. Recent experience, however, has not validated this view. Despite rising oil prices, world output growth has been strong, and although inflation has recently been increasing, it is relatively much lower compared with the 1970s. This paper focuses on the causes of oil price increases and their macroeconomic effects. Different from most of the recent literature on the subject, which understands the price of oil to be an exogenous process, we model the price of oil endogenously within a dynamic stochastic general equilibrium (DSGE) framework. Specifically, using a new Keynesian small open economy model, we analyse the effects of an increase in the price of oil caused by an oil supply shock and an oil demand shock. Our results indicate that the effects of an oil demand shock and an oil supply shock on the small open economy are quite different. In addition, we investigate the sensitivity of the general equilibrium outcomes to the degrees of oil dependence and openness, as well as the strength of the response of monetary policy authority to the inflation. Finally, we evaluate the welfare implications of alternative monetary policy regimes.Oil price, small open economy, demand and supply shocks

Composition of the Government Spending and Behaviour of the Real Exchange Rate in a Small Open Economy

The effects of government spending on a small open economy (SOE) have attracted little attention in the New-Keynesian SOE literature. One exception is Monacelli and Perotti (2007). In this paper we extend their work in several dimensions. First, we include both asset holder and non-asset holder households in the model. Second, we assume that the total government spending consists of spending on consumption goods and transfers to households. Modelling the government spending in this way enables us to analyse the responses of macroeconomic variables to different types of government spending shocks. Our results show that the effect of different types of government spending on the real exchange rate is different. Although, a rise in the government consumption spending leads to a depreciation, a rise in transfers to households leads to an appreciation.Government spending, Asset market participation, Fiscal policy, Monetary policy

On the stability of domestic financial market linkages in the presence of time-varying volatility

We analyze the stability of domestic financial linkages between periods of calm and turbulent market conditions. Our model develops a simultaneous test of shift contagion and bi-directional pure contagion, which is applied to the equity and currency markets of a group of East Asian emerging economies. Our results show a great deal of instability in these markets with widespread evidence of pure contagion in both directions. There is less evidence of shift contagion with the transmission of common shocks unchanged between regimes for the majority of countries.Shift contagion; Pure contagion; Financial market crises; Regime switching

The Effects of Conventional and Unconventional Monetary Policy Surprises on Asset Markets in the United States

This study estimates the impacts of conventional and unconventional monetary policy surprises on asset markets in the United States using the heteroskedasticity-based GMM technique suggested by Rigobon and Sack (2004). Monetary policy surprises have statistically significant effects on major asset markets in both periods, yet magnitudes of responses differ notably in the unconventional period. For the unconventional period, the impacts of monetary policy surprises on stock returns and the implied volatilities in stock and bond markets are found to be lower compared to the conventional period. For most of the other asset returns however, responses are similar or higher in the unconventional period

On the stability of domestic financial market linkages in the presence of time-varying volitility

We analyze the stability of domestic financial linkages between periods of calm and turbulent market conditions. Our model develops a simultaneous test of shift contagion and bi-directional pure contagion, which is applied to the equity and currency markets of a group of East Asian emerging economies. Our results show a great deal of instability in these markets with widespread evidence of pure contagion in both directions. There is less evidence of shift contagion with the transmission of common shocks unchanged between regimes for the majority of countries

The impact of ECB's conventional and unconventional monetary policies on stock markets

Using an event study method, we examine how stock markets respond to the policies of the European Central Bank during 1999–2015. We use market prices of futures (government bonds) to identify surprises in (un)conventional monetary policy. Our results suggest that especially unconventional monetary policy surprises affect the EURO STOXX 50 index. We also find evidence for the credit channel, notably for unconventional monetary policy surprises. Our results also suggest that value and past loser stocks show a larger reaction to monetary policy surprises. These results are confirmed if identification of monetary policy surprises is based on the Rigobon–Sack heteroscedasticity approach