How influential are COVID–19 data points? A fresh look at an estimated small scale DSGE model for the Philippines

Shocks emanating from the global pandemic continue to reshape the macroeconomic landscape—dimming national growth prospects, prolonging widespread financial distress among households, firms, and governments and heightening uncertainty. Using a small-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the Philippines, we examine the model’s sensitivity to COVID-19 datapoints or extreme observations. Relative to estimates during the base period (2002Q1 to 2019Q4), the inclusion of extreme datapoints worsens the model’s log data density progressively, from the consideration of the first quarter of 2020 to the full sample – an indication that shock propagation mechanisms associated with COVID–19 and other natural disasters should be integrated into the model. Even with the inclusion of said extreme observations, however, the model’s parameters are identified, provided identification schemes are evaluated at posterior median estimates. Judging from the sets of parameter estimates relative to the base sample, the effects of extreme observations are found to be non–uniform, especially the size of the shocks. But there are other parameters, notably those that are embedded in the Taylor rule, which are relatively as stable as some household related parameters. These results imply that the size of standard errors for demand, supply, and monetary policy shocks adjust to partially capture the impact of extreme datapoints.

Shock Structures Using the OBurnett Equations in Combination with the Holian Conjecture

In the present work, we study the normal shock wave flow problem using a combination of the OBurnett equations and the Holian conjecture. The numerical results of the OBurnett equations for normal shocks established several fundamental aspects of the equations such as the thermodynamic consistency of the equations, and the existence of the heteroclinic trajectory and smooth shock structures at all Mach numbers. The shock profiles for the hydrodynamic field variables were found to be in quantitative agreement with the direct simulation Monte Carlo (DSMC) results in the upstream region, whereas further improvement was desirable in the downstream region of the shock. For the discrepancy in the downstream region, we conjecture that the viscosity–temperature relation (μ∝Tφ) needs to be modified in order to achieve increased dissipation and thereby achieve better agreement with the benchmark results in the downstream region. In this respect, we examine the Holian conjecture (HC), wherein transport coefficients (absolute viscosity and thermal conductivity) are evaluated using the temperature in the direction of shock propagation rather than the average temperature. The results of the modified theory (OBurnett + HC) are compared against the benchmark results and we find that the modified theory improves upon the OBurnett results, especially in the case of the heat flux shock profile. We find that the accuracy gain is marginal at lower Mach numbers, while the shock profiles are described better using the modified theory for the case of strong shocks.

Credit Shock Propagation Along Supply Chains: Evidence from the CDS Market

Using a panel of credit default swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customers experienced a CDS up-jump event (an adverse credit shock). The value is 74 basis points if their suppliers experienced a CDS up-jump event. The corresponding three-day CASC values are –36 and –38 basis points, respectively, for firms whose customers and suppliers, respectively, experienced an extreme CDS down-jump event (a favorable credit shock). These effects are approximately twice as large for adverse credit shocks originating from natural disasters. Credit shock propagation is absent in inactive supply chains and is amplified if supply chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply chain tiers for adverse shocks but attenuates for favorable shocks. This paper was accepted by Kay Giesecke, finance.

Wave-like global economic ripple response to Hurricane Sandy

Tropical cyclones range among the costliest disasters on Earth. Their economic repercussions along the supply and trade network also affect remote economies that are not directly affected. We here simulate possible global repercussions on consumption for the example case of Hurricane Sandy in the US (2012) using the shock-propagation model Acclimate. The modeled shock yields a global three-phase ripple: an initial production demand reduction and associated consumption price decrease, followed by a supply shortage with increasing prices, and finally a recovery phase. Regions with strong trade relations to the US experience strong magnitudes of the ripple. A dominating demand reduction or supply shortage leads to overall consumption gains or losses of a region, respectively. While finding these repercussions in historic data is challenging due to strong volatility of economic interactions, numerical models like ours can help to identify them by approaching the problem from an exploratory angle, isolating the effect of interest. For this, our model simulates the economic interactions of over 7,000 regional economic sectors, interlinked through about 1.8 million trade relations. Under global warming, the wave-like structures of the economic response to major hurricanes like the one simulated here are likely to intensify and potentially overlap with other weather extremes.

Shock propagation channels behind the global economic contagion network. The role of economic sectors and the direction of trade

Examining the spread of macroeconomic phenomena between countries has become increasingly popular after the 2008 economic crisis, but the recent COVID-19 pandemic rendered this issue much more relevant as it shed more light on the risks arising from strongly interconnected economies. This paper intends to extend previous studies in this line by examining the relationship between trade openness and business cycle synchronization. It extends the scope of previous analyses in three areas. First, we use a Granger-causality approach to identify synchronization. Second, trade is broken down to the sector level and third, we distinguish between upstream and downstream connections. These developments allow for a directed approach in the analysis. We use conditional logit regressions to estimate the effect of trade openness on the probability of shock-transmission. The results presented in this study contribute to the literature in two ways. First, in addition to revealing a positive effect of aggregate two-way trade on shock-contagion, it also points out that this overall effect hides diverse behavior in specific trading sectors as well as upstream and downstream channels. Second, while some sectors are not significant channels of shock-transmission in either directions, upstream channels seem to be important in agriculture while downstream channels dominate machinery and other manufactures. Also, there are sectors (chemicals and related products) trade in which affects shock-transmission negatively.

Equilibria and Systemic Risk in Saturated Networks

We undertake a fundamental study of network equilibria modeled as solutions of fixed-point equations for monotone linear functions with saturation nonlinearities. The considered model extends one originally proposed to study systemic risk in networks of financial institutions interconnected by mutual obligations. It is one of the simplest continuous models accounting for shock propagation phenomena and cascading failure effects. This model also characterizes Nash equilibria of constrained quadratic network games with strategic complementarities. We first derive explicit expressions for network equilibria and prove necessary and sufficient conditions for their uniqueness, encompassing and generalizing results available in the literature. Then, we study jump discontinuities of the network equilibria when the exogenous flows cross certain regions of measure 0 representable as graphs of continuous functions. Finally, we discuss some implications of our results in the two main motivating applications. In financial networks, this bifurcation phenomenon is responsible for how small shocks in the assets of a few nodes can trigger major aggregate losses to the system and cause the default of several agents. In constrained quadratic network games, it induces a blow-up behavior of the sensitivity of Nash equilibria with respect to the individual benefits.

Propagation of International Supply-Chain Disruptions between Firms in a Country

This study shows how import and export shocks propagate through domestic supply chains using actual Japanese supply-chain data and a world input-output table (WIOT) based on firm-level agent-based simulations. We propose three different models with which to connect the domestic firms to a WIOT. Then, we estimate the value-added losses of Japanese firms caused by shocks of different magnitudes and durations originating in China, in the EU and the US, and globally. The volume and rates at which losses increase are very different across the connection models, which indicates that the assignment of international connections to firms matters greatly. The losses increase sublinearly as the duration expands, which indicates that the shock propagation ultimately saturates the economy. Rates of saturation differ substantially depending on the assignment of international connections. The losses increase superlinearly as the initial reduction rate increases. This occurs because there is a greater probability of one supplier being replaced by other suppliers if the reduction is smaller.