What Microeconomic Fundamentals Drove Global Oil Prices during 1986–2020?

The global financial crisis of 2007–2009 caused major economic disturbances in the oil market. In this paper, we consider five variables that describe the microeconomics of the supply of and demand for oil, and evaluate their importance before, during and after the global financial crisis. We consider five dissimilar regimes during the period of January 1986 to the end of 2020: two regimes prior to the global financial crisis, the regime during the crisis, and two regimes after the crisis. The main hypothesis tested is that oil fundamentals of supply and demand remained important, even though the five regimes were dissimilar. We built five boosted and over-fitted neural networks to capture the exact relationships between spot oil prices and oil data related to these prices. This analysis shows that, while the inputs into an accurate neural network can remain the same, the impact of each variable can change considerably during different regimes

Asset Price Bubbles and Central Bank Policies: The Crash of the Jackson Hole Consensus

This chapter examines whether or not monetary policy should respond to asset price bubbles. More specifically, it asks how central banks respond while an asset bubble is growing and how they respond after the bubble bursts. It begins with a general overview of asset bubbles that supports the existence of the real and financial sectors of an economy before discussing how the bursting of asset price bubbles may cause financial instability that often adversely affects the real sector of an economy. It then describes the normative vs. positive responses of a central bank to asset price bubbles, along with the concept of macroprudential regulation as an approach for leaning against asset bubbles. It argues that the high costs associated with the 2007–2009 financial crisis undermined the so-called Jackson Hole Consensus and that the new central bank policy paradigm appears to have shifted toward “leaning against bubbles”

What Has Driven the U.S. Monthly Oil Production Since 2009? Empirical Results from Two Modeling Approaches

From the early 1970s to the Global Financial Crisis of 2007–09, U.S. crude oil production followed a declining trend. After the Global Financial Crisis, U.S. crude oil production increased rapidly. This paper addresses the important question “what economic factors have driven U.S. crude oil production since the Global Financial Crisis?”. We propose that factors such as: the price of oil, the one period lagged price of oil, the price of copper, the crude oil price volatility, the Trade Weighted U.S. Dollar Index, and the high yield index spread, are important explanatory variables. Using two modeling approaches, namely, multiple regression, and the random tree methodology, we conclude that the one month lagged price of oil is the most significant explanatory variable, among all considered, for the upward trend of U.S. oil production from 2009 to early 2020

House Bubbles, Global Imbalances and Monetary Policy in the US

This paper examines the factors driving housing price exuberance in the United States, specifically the influence of expansionary monetary policies and the global saving glut. We employ medium scale Bayesian VAR and time-varying VAR models to estimate the effects of monetary policy and global saving glut shocks on US housing bubbles. We find that, prior to the Global Financial Crisis, the impact of the saving glut shock is more enduring, powerful, and rapid in generating housing bubbles compared to monetary policy shocks. However, the recent housing boom that commenced in 2019 demonstrates a different pattern. Our results suggest that both monetary policy and the global saving glut contribute to the increase in house prices. Counterfactual policy experiments validate this conclusion

Speculative Non-Fundamental Components in Mature Stock Markets: Do They Exist and Are They Related?

Economists have long conjectured that movements in stock prices may involve speculative components, called bubbles. A bubble is defined as the difference between the market value of a security and its fundamental value. The topic of asset bubbles remains controversial because the existence of a bubble is inherently an empirical issue and no satisfactory test has yet been devised to estimate the magnitude of a bubble. This paper proposes a new methodology for testing for the existence of rational bubbles. Unlike previous authors, we treat both the dividend that drives the fundamental part and the nonfundamental process as part of the state vector. This new methodology is applied to the four mature markets of the US, Japan, England, and Germany to test whether a speculative component was present during the period of January 1951 to December 1998 in these markets. The paper also examines whether there are linkages between these national speculative components. We find evidence that the nonfundamental component in the US market causes the other three markets but we find no evidence for reverse causality

Are There Rational Bubbles in the US Stock Market? Overview and a New Test

A speculative bubble is usually defined as the difference between the market value of a security and its fundamental value. Although there are several important theoretical issues surrounding the topic of asset bubbles, the existence of bubbles is inherently an empirical issue that has not been settled yet. This paper reviews several important tests and offers one more methodology that improves upon the existing ones. The new test is applied to the annual US stock market data spanning over a century and at the monthly frequency covering the post-war period. Although we find evidence of stock price bubble in both cases, the post-war period exhibit only positive component whereas the annual data exhibit some episode of negative bubble

Monetary Policy, Financial Shocks and Economic Activity

This paper contributes to a fuller understanding of macroeconomic outcomes to financial market disturbances and the central bank’s role in financial stability. Our two major contributions are conceptual and econometric. Conceptually, we introduce phases of the business cycle and econometrically we employ Bayesian VARs. We document that a shock that increases credit to non-financial sector leads to a persistent decline in economic activity. In addition, we examine whether the behavior of financial variables is useful in signaling the 2007–2009 recession. The answer is positive as our BVAR generates early warning signals pointing to a sustained slowdown in growth. We propose that the expansion phase of the business cycle can be subdivided into an early and a late expansion. Based on this distinction, we show that if the Fed had raised the policy rate when the economy moved from the early to late expansion, it could have mitigated the severity of the 2007–2009 recession

Is the Federal Reserve Bank Stock Market Bubble-Neutral?

This paper argues that the Fed was not stock market bubble-neutral during the last several years. This nonneutrality implies two options: first, the Fed has used monetary policies to prevent the building of the stock market bubble or, second, the Fed has contributed to its development and subsequent deflation. We supply representative quotes from the FOMC transcripts to establish that the Fed has paid significant attention to the valuation of the stock market. These quotes confirm that the stock market’s valuation was an important variable in the Fed’s decision-making and its conduct of monetary policy. We also conduct econometric modeling, by extending the Taylor rule and using data for the 1987-2000 period, to argue that the Fed, perhaps unintentionally, has contributed to the stock market’s overvaluation and subsequent decline