Essays on aggregate macroeconomic shocks and their heterogeneous effects
- Autores: Morteza Ghomi Avili
- Directores de la Tesis: Paraskevi Pappa (dir. tes.)
- Lectura: En la Universidad Carlos III de Madrid ( España ) en 2023
- Idioma: inglés
- Tribunal Calificador de la Tesis: Morten Overgaard Ravn (presid.), Hernan D. Seoane (secret.), Omar Rachedi (voc.)
- Programa de doctorado: Programa de Doctorado en Economía por la Universidad Carlos III de Madrid
- Materias:
- Enlaces
- Tesis en acceso abierto en: e-Archivo
- Resumen
This thesis consists of three chapters, each of which investigates the impact of a distinct macroeconomic shock on the aggregate economy and on different individuals. While each chapter deals with a specific type of macroeconomic shock in a different country, the common thread running through all of them is to evaluate how macroeconomic events affect microeconomic behavior. This research contributes to a deeper understanding of the transmission mechanisms of aggregate shocks- in particular trade shocks, shocks to sentiments, and monetary policy shocks- and to identifying individuals that are mostly affected by them. The results of this study provide policymakers with valuable insights into the distributional effect of macroeconomic shocks. A better understanding of the effects of shocks on individuals helps policymakers in making informed decisions to promote economic stability, foster inclusive growth, and mitigate the adverse consequences of such shocks on vulnerable individuals and sectors.
The first chapter titled ¿Who is Afraid of Sanctions? The Macroeconomic and Distributional Effects of the Sanctions Against Iran¿ focuses on the economic sanctions imposed on Iran at the beginning of 2012 and tries to quantify the aggregate and heterogeneous effects of these sanctions. These sanctions were very comprehensive and severe compared to the other sanctions imposed in the past decades. They restricted to a high degree the country¿s access to international financial markets, levied a strict boycott on its oil exports, and limited the imports of intermediate goods to the country. In 2015, Iran reached a nuclear agreement with the EU and US, known as the Joint Comprehensive Plan of Action (JCPOA), which provided Iran a broad relief from the sanctions. After the agreement, Iran recovered its pre-sanction share in the oil market, joined the international financial markets, and reaccessed the exchange reserve fund.
To compare the economic performance of Iran with its potential path in the absence of the sanctions, I adopt the synthetic control methodology (SCM) and construct a synthetic Iran as a weighted average of some other similar countries. In doing so, I match the GDP growth path, population, and the pre-sanction averages of the rents from natural resources, international trade, industry, agriculture and service production- all in GDP share- of the synthetic Iran with the actual Iran and I analyze how the dynamics of the Iranian economy changed relative to the synthetic economy after the sanctions. The result of this exercise suggests a considerable, severe, and persistent effect of the sanctions on the Iranian economy. During the four years after implementing the sanctions until the JCOPA agreement, Iran¿s real GDP dropped significantly relative to its counterfactual, reaching its maximum of 19.1 percent of GDP in 2015. The negative effect of sanctions persisted for two years after the removal of the sanctions and kept the Iranian economy more than 5 percent under its potential path.
Hence, results for the aggregate economy confirm that economic sanctions are indeed associated with considerable costs in terms of real GDP losses that are long-lived and can be considered as a credible punishment for countries under the sanction. However, from both an economic policy and sociological perspective, it is important to understand the distributional effects of the sanctions. Accordingly, the main contribution of the paper is to analyze the effects of sanctions on poverty mobility in different groups of households classified by households¿ head characteristics and their position in the income distribution. To compare the welfare changes during this period, considering a simple poverty ratio will be misleading. Poverty mobility analysis is preferable since it allows us to assess the nature of these changes and distinguish the case of chronic poverty with that of more volatile poverty which is due to the reallocation of resources. Also, the policy implications for these chronic versus transitory changes in poverty are different.
I trace the poverty dynamics for different household groups after the sanctions by adopting a synthetic panel using Iran¿s household income and expenditure survey data. In particular, I use the household income and expenditure survey (HIES) data provided by the Statistical Center of Iran. Each year, the survey is conducted for about 38000 households and includes their social characteristics, living facilities, expenditures, and total income. The main shortcoming of this database is that the survey sample is updated each year and households cannot be directly compared in two different survey rounds.
Applying the synthetic panel methodology, I use households¿ time-invariant characteristics to construct their income dynamics and tackle the Iranian economy¿s lack of panel data. According to the Iranian microdata, rural, young, and low-educated households, households not working in the public sector, religious minorities, and households belonging to the low-to- middle-income class are the most probable to become poor during the sanction period. Instead, households with occupations in the governmental sector and high-educated heads are suffering the least during the same period. This shows that the economic consequences of the sanctions are not consistent with their initial claimed goal of punishing the government. On the other hand, this implies that policymakers in Iran should support more the vulnerable groups and direct more transfers or other social support toward them.
In the second chapter titled ¿The Sentimental Propagation of Lottery Winnings: Evidence from the Spanish Christmas Lottery¿, a joint paper with Evi Pappa and Isabel Mico Millan, we exploit the Spanish Christmas lottery and consumer confidence survey data to investigate the impact of Spanish Christmas Lottery winnings on consumer sentiment and durable consumption.
The Spanish Lottery has three characteristics that are different from other lotteries: (i) Large size and quantity of prizes each year, (ii) Clustering of prizes to individuals living in the same Spanish province, and (iii) High level of participation. The winning provinces receive an income shock equivalent, on average, to 0.2 percent of their GDP. We employ data from the monthly consumer sentiment survey conducted by the Center of Sociological Research (CIS). Each month around 1,000-1,500 nationally representative households across Spain are asked questions related to their past and intended consumption behavior and their current views and expectations about their own personal finances, as well as about their employment status considering the evolution of the Spanish labor market and the overall economic outlook of Spain.
Following the University of Michigan Survey, we construct regional indices of confidence for the current (ICC) and expected macroeconomic conditions (ICE) and show using local projections that confidence reacts positively and significantly on impact to lottery wins at the regional level. To explore in depth the sentimental propagation of lottery wins, we use binary choice and ordinal. And consumption behavior using the same survey data. Lottery wins change significantly consumer sentiment at the individual level. Households become temporarily more optimistic about their current and future income and employment and tend to update upwards their expectations about the evolution of the Spanish economy if they live in a province that won the lottery. we also find that households in winning provinces increase significantly their consumption of durable goods, in particular, the consumption of furniture and vehicles ¿ relative to households residing out of these provinces - the first six months after the lottery win.
To see if the beliefs captured in sentiment surveys affect consumption, we match individual consumers¿ expectations of future economic conditions from the consumer sentiment survey to their intended durable consumption spending. We find that consumers who have a more positive economic outlook for their future employment based on their assessment of the Spanish labor market and a more positive outlook for the future economic conditions in Spain report more positive spending intentions. We also show that lottery wins affect more significantly the sentiment and intended consumption of young, less educated, unemployed, and low-income households and that the effect of lottery wins on sentiment is stronger during recessions.
The increase in sentiment can be attributed to both news about future economic fundamentals and animal spirits. We try to disentangle the two channels using all available data and provide convincing evidence that lottery wins satisfy the exclusion restriction of having no direct effect on spending intentions. First, given that the probability of being a prize receiver in a winning province is only 0.015%, the lottery win is most likely unrelated to both current and future individual income. Second, surveyed households do not report a significant increase in their ability to pay bills after a lottery win, indicating that the lottery win does not increase the individual income of the respondents.
The Spanish Christmas lottery and in particular its top prize, El Gordo, has a long history in Spain, and people probably understand that if a town in their region wins the lottery, this will probably stimulate the regional economy. In order to discard such an interpretation, we first notice that sentiment increases significantly for questions related to the evolution of the Spanish economy as a whole. If winning the lottery carries news about a possible expansion in the region, rational agents should not expect this expansion to affect the rest of Spain. Hence, the positive reaction of expectations about the Spanish economy can only be attributed to increased optimism rather than news about regional fundamentals.
Furthermore, we examine the dynamic effects of the Spanish lottery shock on macroeconomic conditions using monthly Spanish province-level data. We find that lottery wins have significant and economically important stimulative effects at the provincial level. On average, after a province wins a lottery of 1000 euros per capita the unemployment rate falls sluggishly reaching its maximum fall (-0.3 percentage points) after a year and it remains significantly low 20 months after the initial impact. The significant drop in unemployment cannot be attributed to a reduction in participation induced by the wealth effect of the lottery win. We show that the number of short and long-run contracts signed by individuals registered as unemployed in the National Employment Agency and labor market tightness (defined as the ratio of total contracts per number of unemployed) rise significantly and persistently after the lottery prize shock. Furthermore, the price level in the winning province increases persistently reaching its maximum 17 months after the shock, and exhibits a slow mean reversion, returning to its pre-shock value after approximately two years. Overall, the evidence we report in this chapter gives further support to the presence of countercyclical earning risk especially for young, low educated, low-income and unemployed individuals.
Finally, the third chapter titled ¿Monetary Policy, Economic Uncertainty, and Firms R&D Expenditure¿ studies the response of firms¿ research and development (R&D) expenditure to monetary policy shocks in the US economy. Starting with the empirical investigation, this paper exploits the high-frequency shocks identified using restrictions on the comovement of interest rates and stock prices in a narrow window around FOMC announcements. The identified shocks recover exogenous changes in monetary policy that are unrelated to future fundamentals. Using quarterly data for the US economic indicators between 1990 to 2019, and applying the local projection method the empirical results in this chapter suggest that a 20 basis point increase in the interest rate decreases the aggregate R&D expenditure by 0.6 percent, which leads to a delayed drop in total factor productivity.
Next, I use Compustat firm-level balance-sheet data to analyze the firms¿ dynamic responses to a monetary policy shock in order to better understand firms¿ decisions on R&D investment and to examine possible sources of heterogeneities in response to different monetary policy shocks. I employ panel local projection and focus on firm-quarter observations for the publicly listed firms in the US and for the sample period 1990Q1-2019Q2. The estimation results suggest that the R&D to asset ratio decreases for more than one percent after a one standard deviation shock to the nominal interest rate. This effect persists for up to four years after the shock. It is more significant for the federal funds component and the large-scale asset purchasing component of the monetary policy shock. In contrast, the effect of the forward guidance component fades quickly. When looking at hikes versus cuts, the result shows that contractionary policies have a stronger and more significant effect on R&D expenditure. This is important as it implies that on average monetary policies decrease firms¿ innovative capacity and long-run productivity. Moreover, exploiting the cross-sectional dimension of the firm-level data, I show that firms in manufacturing, transportation, and service sectors exhibit a stronger response to monetary policy shocks, as do smaller firms, low-quality firms, and firms with a lower leverage ratio.
According to the results of a state-dependent local projection, both in the aggregate economy and firm-level data, a contractionary monetary policy has a greater impact on reducing R&D investment during times of high uncertainty. Firms do not exhibit significant reaction in a stable economic environment, while they decrease their R&D investment up to four years after a contractionary monetary policy during uncertain times. A similar result holds when interacting monetary policy shocks with the macroeconomic uncertainty index, or using alternatively financial uncertainty indicators such as VIX. The data give support to the credit transmission channel theory. According to the empirical findings, firms invest less in tangible capital and keep less leverage during uncertain times. Leverage allows firms to acquire assets in excess of net worth.
The empirical results of this chapter hence suggest that interest rate hikes have persistent negative effects on R&D investment and those effects are exacerbated in times of macroeconomic uncertainty. I build a medium-scale dynamic stochastic general equilibrium (DSGE) model with endogenous output growth and financial frictions to interpret the empirical findings of the paper. The model features sticky prices in the goods market, endogenous growth through firms¿ investment in R&D, and financial frictions in the form of a borrowing constraint on production costs. This working capital constraint implies that interest rate changes affect directly firms¿ costs. Moreover, the working capital constraint serves to distinguish the role of the two types of capital in the economy: The accumulation of physical capital relaxes the financial constraint, while R&D investment increases the TFP of the economy.
I model macroeconomic uncertainty in the model as an increase in the volatility of TFP shocks. When TFP volatility increases, firms keep less collateralizable assets in equilibrium. Given that the financial constraint is directly related to the amount of capital firms keep, this implies a stringency in the financial constraints for them. As a result, in response to a monetary policy contraction, firms decrease their R&D investment more. This mechanism is compatible with the data patterns discussed previously: When uncertainty is high, financial constraints further deteriorate the response of R&D investment to the monetary policy contraction. This is because higher uncertainty about the realization of the TFP makes the returns to R&D investment more uncertain. On the other hand, more uncertainty related to the TFP shocks realization renders the need for capital accumulation more vital when monetary policy contracts. The combination of these two effects with the working capital channel exacerbates the negative effects of a monetary policy contraction in this environment. The results of this chapter imply that central banks need to consider the long-run TFP and economic hysteresis in their policy rule, especially during highly uncertain times. A detailed analysis of optimal monetary policy in this environment and conditional on aggregate uncertainty is an essential direction for future research.
