Essays in Empirical Macroeconomics

This thesis is a collection of five essays in empirical macroeconomics. The first paper evaluates the effectiveness of fiscal policy in different economic environments. The results show that, contrary to conventional wisdom, fiscal multipliers are not necessarily smaller in countries relatively open to trade and financial flows and operating under flexible exchange rates. The relationship between the size of fiscal multipliers and the three dimensions of openness — trade openness, capital mobility, and exchange rate flexibility — hinges on the response of the real exchange rate and the degree of monetary policy accommodation, which underscores the importance of fiscal and monetary policy interaction in understanding the fiscal transmission mechanism. The second paper examines the effects of an adverse oil price shock in oil-exporting countries under alternative exchange rate and fiscal policy arrangements. The results show that output and government consumption fall, as expected, but the responses are smaller and smoother in countries with flexible exchange rates and oil funds. This highlights the shock-absorbing property of flexible exchange rates and the macroeconomic stabilization role of oil funds, making a case for oil exporters to adopt more flexible exchange rates and establish oil funds as fiscal buffers. The third paper examines the roles of oil funds and institutional quality in reducing fiscal procyclicality and macroeconomic volatility in oil-exporting countries. The results show that oil funds are effective in reducing fiscal procyclicality in countries with high institutional quality. There is also a reduction in the procyclical bias in countries with low institutional quality but the evidence is less compelling. Nonetheless, oil funds are associated with reduced volatility of government consumption and the real exchange rate in countries with low institutional quality. These findings demonstrate the potency of oil funds in macroeconomic stabilization, but also reinforce the importance of good institutions. The fourth paper examines the conduct of fiscal policy in Brunei, focusing on the cyclical patterns in government expenditure. In spite of relatively large fiscal buffers in Brunei’s oil funds, the results provide evidence of procyclical fiscal policy, which exacerbates the business cycle. This behaviour is primarily driven by procyclical current expenditure while capital expenditure is largely acyclical. A key policy recommendation would be to adopt clear fiscal rules to integrate the oil funds into the country’s macroeconomic policy framework to delink government spending from volatile oil revenue. The fifth paper investigates the sources of macroeconomic fluctuations in Brunei. The results show that oil price shocks account for only a small proportion of output fluctuations while productivity shocks have the largest share. Real exchange rate movements are largely driven by demand shocks while monetary shocks explain most of the variability in prices. Economic policies should focus on productivity improvement and capital investment to increase output in the long run, and the conduct of fiscal policy should take into account the impact on real exchange rate volatility

The effects of macroeconomic shocks on the Brunei economy: a sign restriction approach

This paper examines the impact of oil price, foreign monetary policy, and domestic government spending shocks on the Brunei economy from 2003Q1 to 2014Q3 based on a structural vector autoregression model with shocks identified using the sign restriction methodology. The results show that an unanticipated oil price decline has a negative effect on government expenditure, and consequently non-oil GDP. Foreign monetary policy shocks also affect the economy through their impact on the interest rate, prices, and the real exchange rate. The procyclical fiscal stance, which exacerbates the business cycle, is an important source of macroeconomic fluctuations. Government expenditure smoothing should be accorded high importance in the conduct of fiscal policy. This could be achieved by using oil reserve funds to finance budget deficits to delink government spending from volatile oil revenue.This work was supported by the Centre for Strategic and Policy Studies, Brunei Darussalam

How do oil supply and demand shocks affect Asian stock markets?

This paper examines how oil market shocks affect Asian stock prices using the structural vector autoregression (VAR) approach. Global oil supply and demand shocks are disentangled using sign restrictions and elasticity bounds. Oil price increases are bad news only if the source is from oil-market-specific demand shifts. Northeast Asian stock markets are more resilient as investors' expectation of continued economic growth outweighs the adverse effect of higher oil prices. Increased global economic activity also stimulates stock prices. Global oil shocks are more important in explaining variability in Asian stock returns compared with the United States, suggesting different dynamics in Asi

Fiscal Policy in Oil-exporting Countries: The Roles of Oil Funds and Institutional Quality

Oil-exporting countries face challenges in the conduct of fiscal policy owing to volatile oil revenues, especially in countries with weak institutions. Many oil exporters have established oil funds to delink government expenditure from oil revenues; however, their effectiveness remains unresolved. This paper examines the roles of oil funds and institutional quality in reducing fiscal procyclicality and macroeconomic volatility in 42 oil-exporting countries from 1960 to 2014 using panel vector autoregression techniques. The results show that oil funds are effective in reducing fiscal procyclicality in countries with high institutional quality. There is also a reduction in the procyclical bias in those with low institutional quality but the statistical evidence is weak. Nevertheless, oil funds are associated with reduced volatility of government consumption and the real exchange rate in countries with low institutional quality. These findings give credence to the macroeconomic stabilization role of oil funds but also reinforce the importance of good institutions.This research is supported by the Centre for Strategic and Policy Studies (CSPS), Brunei Darussala

Oil price shocks and macroeconomic adjustments in oil-exporting countries

This paper examines the macroeconomic effects of an adverse oil price shock under different exchange rate and fiscal policy arrangements in 40 oilexporting countries from 1973 to 2010 using panel vector autoregression techniques. The results show that output and government consumption fall in response to an oil price decline. However, the output response is significantly smaller and smoother in countries with flexible exchange rate regimes due to a larger and immediate real exchange rate depreciation. There is also less need for contractionary fiscal policy as the real depreciation appears to play a sufficient dampening role. In contrast, countries with fixed exchange rate regimes experience a small and delayed real depreciation, leaving fiscal policy to bear the bulk of the macroeconomic adjustments costs. Nevertheless, the presence of oil funds in these countries is associated with smaller fiscal spending cuts and hence a reduced output fall. These findings highlight the shockabsorbing property of flexible exchange rates and the potential macroeconomic stabilisation role of oil funds in insulating against adverse oil price movements, making a case for oil exporters to adopt more flexible exchange rate regimes and establish oil funds as fiscal buffers.I gratefully acknowledge funding from ADEW, ANU Vice Chancellor’s Travel Grant and ANU Crawford School of Public Policy to present this paper at the conference

DIFFERENTIAL IMPACT OF COVID-19 IN AUSTRALIA: EVIDENCE FROM GOOGLE SEARCH DATA

Quantifying the immediate economic impact of COVID-19 is important to design proportionate relief and support policies. However, surveys of businesses and households are only typically available after considerable delay. We use near-real-time Google search data to examine the temporal and spatial impacts of COVID-19 on service sector activity in Australia. We find that the travel-related and consumer-facing sectors, such as aviation, tourism, hotels, restaurants, and retail trade, suffered steep contractions during the outbreak. By contrast, sectors that involve less physical and face-to-face interaction, such as info-communication technology (ICT) and delivery services, experienced significant gains. The magnitude of the impact is large. During the first COVID-19 wave between January and March, the demand for air travel, tourism, and hotel accommodation declined by 60–80%, while the demand for ICT and delivery services surged by more than 50%. In states and territories with low caseloads, the impact has also been severe due to government-enforced nationwide social distancing measures to contain disease spread. However, in states and territories that eased restrictions earlier and faster, there has been no significant reduction in demand for certain consumer-facing services. Our findings demonstrate the usefulness of high-frequency and near-real-time indicators in monitoring the rapidly unfolding effects of COVID-19

Fiscal multipliers: new evidence from a large panel of countries

This paper evaluates the effectiveness of fiscal policy by employing a structural panel vector autoregression model with a shock to fiscal spending identified via theoretical robust sign restrictions. Using an annual data set of 120 countries over the period 1960-2014, the results show that fiscal multipliers are larger in advanced economies, when public debt is low, at a high level of financial development, in a financial crisis, and during business cycle downturns. Contrary to conventional wisdom, fiscal multipliers are not necessarily smaller in countries that are relatively open to trade and capital flows and operating under flexible exchange rate regimes. The relationship between the size of fiscal multipliers and the three dimensions of openness-trade openness, capital mobility, and exchange rate flexibility-hinges on the response of the real exchange rate and the domestic monetary policy pursued.This work was supported by the Centre for Strategic and Policy Studies, Brunei Darussalam

Debt and financial crises

Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises- after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses

What do we know about SARS-CoV-2 transmission? A systematic review and meta-analysis of the secondary attack rate and associated risk factors.

IntroductionCurrent SARS-CoV-2 containment measures rely on controlling viral transmission. Effective prioritization can be determined by understanding SARS-CoV-2 transmission dynamics. We conducted a systematic review and meta-analyses of the secondary attack rate (SAR) in household and healthcare settings. We also examined whether household transmission differed by symptom status of index case, adult and children, and relationship to index case.MethodsWe searched PubMed, medRxiv, and bioRxiv databases between January 1 and July 25, 2020. High-quality studies presenting original data for calculating point estimates and 95% confidence intervals (CI) were included. Random effects models were constructed to pool SAR in household and healthcare settings. Publication bias was assessed by funnel plots and Egger's meta-regression test.Results43 studies met the inclusion criteria for household SAR, 18 for healthcare SAR, and 17 for other settings. The pooled household SAR was 18.1% (95% CI: 15.7%, 20.6%), with significant heterogeneity across studies ranging from 3.9% to 54.9%. SAR of symptomatic index cases was higher than asymptomatic cases (RR: 3.23; 95% CI: 1.46, 7.14). Adults showed higher susceptibility to infection than children (RR: 1.71; 95% CI: 1.35, 2.17). Spouses of index cases were more likely to be infected compared to other household contacts (RR: 2.39; 95% CI: 1.79, 3.19). In healthcare settings, SAR was estimated at 0.7% (95% CI: 0.4%, 1.0%).DiscussionWhile aggressive contact tracing strategies may be appropriate early in an outbreak, as it progresses, measures should transition to account for setting-specific transmission risk. Quarantine may need to cover entire communities while tracing shifts to identifying transmission hotspots and vulnerable populations. Where possible, confirmed cases should be isolated away from the household