Published and Forthcoming Papers
Do Fossil Fuel Firms Reframe Online Climate and Sustainability Communication? A Data-Driven Analysis, with Ramit Debnath, Danny Ebanks, Thomas Roulet, and R. Michael Alvarez (2023), npj Climate Action (Nature Portfolio) 2:47, pp. 1–12.
Abstract: Identifying climate misinformation on social media is crucial to climate action. Misinformation comes in various forms; however, subtler strategies, such as emphasizing favorable interpretations of events or data, or reframing conversations to fit preferred narratives, have received little attention. This paper examines online climate and sustainability communication behavior over seven years (2014–2021) across three influential stakeholder groups consisting of eight fossil fuel firms (industry), eleven non-governmental organizations (NGOs), and eight inter-governmental organizations (IGOs). We examine historical Twitter interaction data (n = 728,967) using joint-sentiment topic modeling and vector autoregression to measure online interactions and influences amongst these groups. We report three key findings. First, we find that the stakeholders in our sample are responsive to one another online, especially over topics in their respective areas of domain expertise. Second, the industry is more likely to respond to IGOs’ and NGOs’ online messaging changes, especially regarding environmental justice and climate action topics. The fossil fuel industry is more likely to discuss public relations, advertising, and corporate sustainability topics. Third, we find a null relationship between climate change driven-extreme weather events and stock market performance. In conclusion, we provide a data-driven foundation for understanding the influence of powerful stakeholder groups on shaping the online climate and sustainability information ecosystem around climate change.
University of Cambridge News: The paper was highlighted by Cambridge Zero and Insight from the Judge Business School.
Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness, with Patrycja Klusak, Matthew Agarwala, Matt Burke, and Moritz Kraemer (2023), Management Science 69:12, pp. 7468–7491.
Abstract: Enthusiasm for ‘greening the financial system’ is welcome, but a fundamental challenge remains: financial decision makers lack the necessary information. It is not enough to know that climate change is bad. Markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, we simulate the effect of climate change on sovereign credit ratings for 108 countries, creating the world’s first climate-adjusted sovereign credit rating. Under various warming scenarios, we find evidence of climate-induced sovereign downgrades as early as 2030, increasing in intensity and across more countries over the century. We find strong evidence that stringent climate policy consistent with limiting warming to below 2°C, honouring the Paris Climate Agreement, and following RCP 2.6 could nearly eliminate the effect of climate change on ratings. In contrast, under higher emissions scenarios (i.e., RCP 8.5), 63 sovereigns experience climate-induced downgrades by 2030, with an average reduction of 1.02 notches, rising to 80 sovereigns facing an average downgrade of 2.48 notches by 2100. We calculate the effect of climate-induced sovereign downgrades on the cost of corporate and sovereign debt. Across the sample, climate change could increase the annual interest payments on sovereign debt by US$ 22–33 billion under RCP 2.6, rising to US$ 137–205 billion under RCP 8.5. The additional cost to corporates is US$ 7.2–12.6 billion under RCP 2.6, and US$ 35.8–62.6 billion under RCP 8.5
JEL Classifications: C33, C53, G10, G18, H63, O44, Q51, Q54.
Key Words: Sovereign credit rating, climate change, counterfactual analysis, climate-economy models, corporate debt, sovereign debt.
Cambridge Working Paper Version: CWPE 2127.
VoxEU Column: You can also read a VoxEU column (from March 25, 2021) entitled Rising temperatures, melting ratings based on this work here.
Media Coverage: This paper has been covered extensively in major international news outlets including, Bloomberg, Financial Times, Forbes, Guardian, The Hill, The New York Times, Reuters, Politico, The Telegraph, The Times, Bloomberg, Financial Times, Bloomberg Markets Magazine, Reuters, Bloomberg and Financial Times. It has also been featured in national news agencies in Brazil, China, India, Iran, Mexico, Netherlands, Poland, Singapore, the United Kingdom, and the United States, to name a few. This paper was also named runner-up in the Financial Times Responsible Business Education Awards in the category “academic research with impact”.
University of Cambridge News: The paper was also highlighted by the University of Cambridge Research News
and Judge Business School News.
Climate Change and Economic Activity: Evidence from U.S. States, with Ryan N. C. Ng, M. Hashem Pesaran, Mehdi Raissi, and Jui-Chung Yang (2023), Oxford Open Economics 2, pp. 1–11.
Abstract: We investigate the long-term macroeconomic effects of climate change across 48 U.S. states over the period 1963--2016 using a novel econometric strategy which links deviations of temperature and precipitation (weather) from their long-term moving-average historical norms (climate) to various state-specific economic performance indicators at the aggregate and sectoral levels. We show that climate change has a long-lasting adverse impact on real output in various states and economic sectors, and on labour productivity and employment in the United States. Moreover, in contrast to most cross-country results, our within U.S. estimates tend to be asymmetrical with respect to deviations of climate variables (including precipitation) from their historical norms.
JEL Classifications: C33, O40, O44, O51, Q51, Q54.
Key Words: Climate change, economic growth, adaptation, United States.
Cambridge Working Paper Version: CWPE 2205.
Codes and Data: Click here for the Stata data, do, and ado files needed to replicate the empirical findings in "Climate Change and Economic Activity: Evidence from U.S. States".
University of Cambridge News: The paper was highlighted by Insight from the Judge Business School.
Letter from Congress to Federal Reserve Board: This paper was extensively cited by 25 members of United States Congress in a letter to the Chair of the Federal Reserve Board, the letter is available from here.
Short Video: Click here for a short video with some of the highlights of this paper and do also check out this video by Oxford University Press on our research on the Economics of Climate Change with over 400K views (how did that happen)!
Social Media Enables People-Centric Climate Action in the Hard-to-Decarbonise Building Sector, with Ramit Debnath, Ronita Bardhan, Darshil U. Shah, Michael H. Ramage, R. Michael Alvarez, and Benjamin K. Sovacool (2022), Scientific Reports (Nature Portfolio) 12, pp. 19017/1–17.
Abstract: The building and construction sector accounts for around 39% of global carbon dioxide emissions and remains a hard-to-abate sector. We use a data-driven analysis of global high-level climate action on emissions reduction in the building sector using 256,717 English-language tweets across a 13-year time frame (2009 - 2021). Using natural language processing and network analysis, we show that public sentiments and emotions on social media are reactive to these climate policy actions. Between 2009-2012, discussions around green building-led emission reduction efforts were highly influential in shaping the online public perceptions of climate action. From 2013-to 2016, communication around low-carbon construction and energy efficiency significantly influenced the online narrative. More significant interactions on net-zero transition, climate tech, circular economy, mass timber housing and climate justice in 2017-2021 shaped the online climate action discourse. We find positive sentiments are more prominent and recurrent and comprise a larger share of the social media conversation. However, we also see a rise in negative sentiment by 30-40% following popular policy events like the IPCC report launches, the Paris Agreement and the EU Green Deal. With greater online engagement and information diffusion, social and environmental justice topics emerge in the online discourse. Continuing such shifts in online climate discourse is pivotal to a more just and people-centric transition in such hard-to-decarbonise sectors.
JEL Classifications: C63, Q54.
Key Words: Emission, climate change, building, computational social science, people-centric transition, Twitter.
University of Cambridge News: The paper was also highlighted by the University of Cambridge Research News and Insight from the Judge Business School.
Macroeconomic Effects of Global Shocks in the GCC: Evidence from Saudi Arabia, with Mehdi Raissi and Niranjan Sarangi (2022), Middle East Development Journal 14:2, pp. 219–239.
Abstract: We develop a quarterly macro-econometric model for the Saudi economy over the period 1981Q2-2018Q2 and integrate it within a compact model of the world economy (including the global oil market). This framework enables us to disentangle the size and speed of the transmission of growth shocks originating from the United States, China and the world economy to Saudi Arabia, as well as study the implications of stress in global financial markets, low oil prices and domestic fiscal adjustment on the Saudi economy. Results show that Saudi Arabia's economy is more sensitive to developments in China than to shocks in the United States—in line with the direction of evolving trade patterns and China's growing role in the global oil market. A global growth slowdown (e.g., from trade tensions or geopolitical developments) could have significant implications for Saudi Arabia (with a growth elasticity of about 2½ after one year) and the oil market (reducing prices by about 5 percent for 0.5 percentage point reduction in global growth). We also illustrate that a 10 percent lower oil prices and stress in global financial markets could both have a negative effect on the Saudi economy, but given the prevailing social contract in Saudi Arabia, their impact is countered by fiscal easing. Finally, we argue that a domestic fiscal adjustment in Saudi Arabia does not show a negative impact on economic growth in the data. The impact on growth would depend upon the quality of fiscal adjustment and whether it is complemented with structural reforms or not.
JEL Classifications: C32, E32, E62, F44, O53.
Key Words: Saudi Arabia, stress in global financial markets, international business cycle, fiscal policy, and Global VAR.
United Nations (Economic and Social Commission for Western Asia) Working Paper Version: E/ESCWA/EDID/2019/WP.15.
Climate Change and Fiscal Sustainability: Risks and Opportunities, with Matthew Agarwala, Matt Burke, Patrycja Klusak, Ulrich Volz, and Dimitri Zenghelis (2021), National Institute Economic Review 258, pp. 28–46.
Abstract: Both the physical and transition-related impacts of climate change pose substantial macroeconomic risks. Yet, markets still lack credible estimates of how climate change will affect debt sustainability, sovereign creditworthiness and the public finances of major economies. We present a taxonomy for tracing the physical and transition impacts of climate change through to impacts on sovereign risk. We then apply the taxonomy to the UK’s potential transition to net zero. Meeting internationally agreed climate targets will require an unprecedented structural transformation of the global economy over the next two or three decades. The changing landscape of risks warrants new risk management and hedging strategies to contain climate risk and minimise the impact of asset stranding and asset devaluation. Yet, conditional on action being taken early, the opportunities from managing a net zero transition would substantially outweigh the costs.
JEL Classifications: H5, H6, H62, J24, N1, Q54, Q55.
Keywords: Sovereign debt, climate change, net zero, transition risk, productivity.
Cambridge Working Paper Version: CWPE 2163.
Long-Term Macroeconomic Effects of Climate Change: A Cross-Country Analysis, with Matthew E. Kahn, Ryan N. C. Ng, M. Hashem Pesaran, Mehdi Raissi, and Jui-Chung Yang (2021), Energy Economics 104, pp. 105624/1–13.
Abstract: We study the long-term impact of climate change on economic activity across countries, using a stochastic growth model where productivity is affected by deviations of temperature and precipitation from their long-term moving average historical norms. Using a panel data set of 174 countries over the years 1960 to 2014, we find that per-capita real output growth is adversely affected by persistent changes in the temperature above or below its historical norm, but we do not obtain any statistically significant effects for changes in precipitation. We also show that the marginal effects of temperature shocks vary across climates and income groups. Our counterfactual analysis suggests that a persistent increase in average global temperature by 0.04°C per year, in the absence of mitigation policies, reduces world real GDP per capita by more than 7 percent by 2100. On the other hand, abiding by the Paris Agreement goals, thereby limiting the temperature increase to 0.01°C per annum, reduces the loss substantially to about 1 percent. These effects vary significantly across countries depending on the pace of temperature increases and variability of climate conditions. The estimated losses would increase to 13 percent globally if country-specific variability of climate conditions were to rise commensurate with annual temperature increases of 0.04°C.
JEL Classifications: C33, O40, O44, O51, Q51, Q54.
Key Words: Climate change, economic growth, adaptation, counterfactual analysis.
NBER Working Paper Version: No. 26167
Codes and Data: Click here for the Stata data, do, and ado files needed to replicate the empirical findings in "Long-Term Macroeconomic Effects of Climate Change: A Cross-Country Analysis".
Media Coverage: This paper has been covered extensively in major international news outlets including the Washington Post, Bloomberg, Fox News, The New York Times, Reuters, CNBC, New York Post, The Telegraph, the Financial Times, and Scientific American. It has also been featured in national news agencies in China, India, Japan, the United Kingdom, and the United States, to name a few. This paper was also highlighted by the Financial Times in its Special Report Business School Insights.
TV interview: Click here to see a Cheddar TV interview with Kamiar Mohaddes. The paper was also covered (including an interview with Kamiar Mohaddes) by CGTN America's Global Business show and CGTN's the World Today show.
Summary in Persian: A summary of this paper in Persian was published in Tejarat-e Farda, Issue 434 (December 4, 2021), pp. 70-71.
Radio Interview: Click here to listen to a radio interview with Kamiar Mohaddes on Olivier Knox’s the Big Picture show on SiriusXM’s POTUS channel.
University of Cambridge News: The paper was also highlighted by the University of Cambridge Research News, the Gates Cambridge Trust and Insight from the Judge Business School.
Conference Talk: Click here for a video recording of a talk based on this paper given by M. Hashem Pesaran at the Federal Reserve Bank of San Francisco's Conference on the Economics of Climate Change.
Letter from Congress to Federal Reserve Board: This paper was extensively cited by 25 members of United States Congress in a letter to the Chair of the Federal Reserve Board, the letter is available from here.
Short Video: Click here for a short video with some of the highlights of this paper and do also check out this video by Oxford University Press on our research on the Economics of Climate Change with over 400K views (how did that happen)!
A Counterfactual Economic Analysis of Covid-19 Using a Threshold Augmented Multi-Country Model, with Alexander Chudik, M. Hashem Pesaran, Mehdi Raissi, and Alessandro Rebucci (2021), Journal of International Money and Finance 119, pp. 102477/1–26.
Abstract: This paper develops a threshold-augmented dynamic multi-country model (TGVAR) to quantify the macroeconomic effects of Covid-19. We show that there exist threshold effects in the relationship between output growth and excess global volatility at individual country levels in a significant majority of advanced economies and in the case of several emerging markets. We then estimate a more general multi-country model augmented with these threshold effects as well as long term interest rates, oil prices, exchange rates and equity returns to perform counterfactual analyses. We distinguish common global factors from trade-related spillovers, and identify the Covid-19 shock using GDP growth forecast revisions of the IMF in 2020Q1. We account for sample uncertainty by bootstrapping the multi-country model estimated over four decades of quarterly observations. Our results show that the Covid-19 pandemic will lead to a significant fall in world output that is most likely long-lasting, with outcomes that are quite heterogenous across countries and regions. While the impact on China and other emerging Asian economies are estimated to be less severe, the United States, the United Kingdom, and several other advanced economies may experience deeper and longer-lasting effects. Non-Asian emerging markets stand out for their vulnerability. We show that no country is immune to the economic fallout of the pandemic because of global interconnections as evidenced by the case of Sweden. We also find that long-term interest rates could fall significantly below their recent lows in core advanced economies, but this does not seem to be the case in emerging markets.
JEL Classifications: C32, E44, F44.
Key Words: Threshold-augmented Global VAR (TGVAR), international business cycle, Covid-19, global volatility, threshold effects.
NBER Working Paper Version: No. 27855.
Matlab Codes and Data: Click here for the data as well as the Matlab files needed to replicate the empirical findings in "A Counterfactual Economic Analysis of Covid-19 Using a Threshold Augmented Multi-Country Model".
Video: You can watch M. Hashem Pesaran presenting our paper at the CAMA global webinar series here. You can also watch a short video of M. Hashem Pesaran discussing some of our preliminary results at the Royal Economics Society Policy Webinar Series on July 16, 2020 here.
Podcast: Click here to listen to an episode of the University of Cambridge podcast series Science, Policy, and a Green Recovery, where Kamiar Mohaddes discusses the macroeconomic effects of the Covid-19 shock, the long-term costs of climate change and the potential for a green recovery in dealing with both with Rob Doubleday and Nina Seega.
VoxEU Column: You can also read a VoxEU column (from October 19, 2020) entitled Economic Consequences of Covid-19: A Counterfactual Multi-Country Analysis based on this work here.
Media Coverage: This paper has been covered in various news outlies, such as Times of India, Donya-e Eqtesad, and Tejarat-e Farda.
University of Cambridge News: The paper was also highlighted by the University of Cambridge Research News and the Gates Cambridge Trust.
Covid-19 Fiscal Support and its Effectiveness, with Alexander Chudik and Mehdi Raissi (2021), Economics Letters 205, pp. 109939/1–5.
Abstract: This paper uses a threshold-augmented Global VAR model to quantify the macroeconomic effects of countries' discretionary fiscal actions in response to the Covid-19 pandemic and its fallout. Our results are threefold: (1) fiscal policy is playing a key role in mitigating the effects of the pandemic; (2) all else equal, countries that implemented larger fiscal support are expected to experience less output contractions; (3) emerging markets are also benefiting from the synchronized fiscal actions globally through the spillover channel and reduced financial market volatility.
JEL Classifications: C32, E44, E62, F44.
Key Words: Threshold-augmented Global VAR (TGVAR), Covid-19, threshold effects, fiscal policy.
Cambridge Working Paper Version: CWPE 2116.
Matlab Codes and Data: Click here for the data as well as the Matlab files needed to replicate the empirical findings in "Covid-19 Fiscal Support and its Effectiveness".
University of Cambridge News: The paper was highlighted by Insight from the Judge Business School.
Media Coverage: The paper was featured in the Financial Times and in an interview with Kamiar Mohaddes in Le Figaro.
Illegal Drugs and Public Corruption: Crack Based Evidence from California, with Alessandro Flamini and Babak Jahanshahi (2021), European Journal of Political Economy 69, pp. 102005/1–14.
Abstract: Do illegal drugs foster public corruption? To estimate the causal effect of drugs on public corruption, we adopt the synthetic control method and exploit the fact that crack cocaine markets emerged in California in 1981, before reaching any other U.S. state. Our results show that public corruption more than tripled in California in the first three years following the arrival of crack cocaine. We argue that this resulted from the particular characteristics of illegal drugs: cheap technology and rigid demand, which fosters a convergence of interests between criminals and corrupted public officials resulting in a positive causal impact of illegal drugs on corruption.
JEL Classifications: C12, D73, K42.
Key Words: Public corruption, crack cocaine, synthetic control, illegal drugs, law enforcement, difference in difference, and organized crime.
CAMA Working Paper Version: No. 39/2018.
Poster: Click here for the poster used at the AEA hosted Poster Session at the 2019 ASSA Annual Meeting.
Interview with the AEA: Alessandro Flamini sat down with the AEA to discuss our paper on how the crack cocaine market fostered public corruption in California during early 1980s. You can watch the interview here.
University of Cambridge News: The paper was highlighted by Insight from the Judge Business School.
Media Coverage: The paper was featured in Tejarat-e Farda and in an interview with Kamiar Mohaddes.
Words Against Injustices: A Deep Narrative Analysis of Energy Cultures in Poverty of Abuja, Mumbai and Rio de Janeiro, with Ramit Debnath, Ronita Bardhan, Sarah Darby, Minna Sunikka-Blank, Ana Cristina Villaça Coelho, and Abdulrasheed Isa (2021), Energy Research & Social Science 72, pp. 101892/1–17.
Abstract: Slum rehabilitation housing (SRH) are critical transitional spaces in urban informality that has deep-rooted implications on poverty alleviation efforts. However, current literature reports systemic injustices in SRH on access to essential services, including energy injustices. This study investigated distributive injustices in the SRH across three cities, Abuja, Mumbai and Rio de Janeiro, developing ‘energy cultures’ narratives. It employed a computational social science methodology that used textual analysis, followed by a constructivist grounded theoretic approach to inform just policy design. The analysis was performed at two scales to identify and contrast injustices in the study areas. The result at an aggregated scale showed commonalities were around the poor design of the built environment, administrative lags of the utilities and high electricity bills. Case study-specific results showed that poverty penalties were linked with the energy cultures of each SRHs. In the Mumbai case, poverty penalties were associated with the aspirational purchase of household appliances due to move from slums to SRH. The Abuja case showed low power quality and load shedding frequently damaged appliances that increase the maintenance costs for the occupants. The Rio de Janeiro SRH case had injustices embedded through the adoption of inefficient appliances received as charity from higher-income households. Fuel stacking was also observed in the SRH that illustrated cultural identities associated with cooking energy. The conclusion was drawn to support just policy design by considering the socio-cultural context of the built environment, improving utility governance and promoting cleaner fuel mix at the household level.
Key Words: Energy justice, poverty, computational social science, energy cultures, and machine learning.
Cambridge Working Paper Version: CWPE 20101.
The Growth Effects of El Niño and La Niña: Local Weather Conditions Matter, with Cécile Couharde, Olivier Damette, and Rémi Generoso (2020), Annals of Economics and Statistics 140, pp. 83–126.
Abstract: This paper contributes to the climate-economy literature by analysing the role of weather patterns in influencing the transmission of global climate cycles to economic growth. More specifically, we focus on El Niño Southern Oscillation (ENSO) events and their interactions with local weather conditions, taking into account the heterogeneous and cumulative effects of weather patterns on economic growth and the asymmetry and nonlinearity in the global influence of ENSO on economic activity. Using data on 75 “teleconnected” countries over the period 1975-2014, we provide evidence for the negative growth effects of ENSO events and show that there are substantial differences between its warm (El Niño) and cold (La Niña) phases and between climate zones. These differences are due to the heterogeneity in weather responses to ENSO events, known as teleconnections, which has so far not been taken into account by economists, and which will become more important in the climate economy relationship given that climate change may substantially strengthen long-distance relationships between weather patterns around the world. We also show that the negative growth effects associated with these teleconnections are robust to the definition of ENSO events, to the use of alternative climatic variables and more important over shorter meteorological onsets.
JEL Classifications: C33, O40, Q54.
Key Words: Economic growth, ENSO events, weather shocks, climate change.
Cambridge Working Paper Version: CWPE 1922.
The Adaptive Investment Effect: Evidence from Chinese Provinces, with Rhys J. Williams (2020), Economics Letters 193, pp. 109332/1–4.
Abstract: This paper investigates the "adaptive investment effect", a redirection of investment towards adaptive capital in order to mitigate the negative effects of climate change. We find that the impact of investment on economic growth is reduced by between 27% and 37% in Chinese provinces investing more in adaptive capital. This implies that the benefits from mitigation policies are greater than existing studies suggest.
JEL Classifications: C33, O40, O53, Q51, Q54.
Key Words: Climate change, adaptation, investment, and China.
Cambridge Working Paper Version: CWPE 2046.
Grounded Reality Meets Machine Learning: A Deep-narrative Analysis Framework for Energy Policy Research, with Ramit Debnath, Sarah Darby, Ronita Bardhan, and Minna Sunikka-Blank (2020), Energy Research & Social Science 69, pp. 101704/1–14.
Abstract: Text-based data sources like narratives and stories have become increasingly popular as critical insight generator in energy research and social science. However, their implications in policy application usually remain superficial and fail to fully exploit state-of-the-art resources which digital era holds for text analysis. This paper illustrates the potential of deep-narrative analysis in energy policy research using text analysis tools from the cutting-edge domain of computational social sciences, notably topic modelling. We argue that a nested application of topic modelling and grounded theory in narrative analysis promises advances in areas where manual-coding driven narrative analysis has traditionally struggled with directionality biases, scaling, systematisation and repeatability. The nested application of the topic model and the grounded theory goes beyond the frequentist approach of narrative analysis and introduces insight generation capabilities based on the probability distribution of words and topics in a text corpus. In this manner, our proposed methodology deconstructs the corpus and enables the analyst to answer research questions based on the foundational element of the text data structure. We verify theoretical compatibility through a meta- analysis of a state-of-the-art bibliographic database on energy policy, narratives and computational social science. Furthermore, we establish a proof-of-concept using a narrative-based case study on energy externalities in slum rehabilitation housing in Mumbai, India. We find that the nested application contributes to the literature gap on the need for multidisciplinary methodologies that can systematically include qualitative evidence into policymaking.
Key Words: Energy policy, narratives, topic modelling, computational social science, text analysis, methodological framework.
Cambridge Working Paper Version: CWPE 2062.
Asymmetric Oil Prices and Trade Imbalances: Does the Source of the Oil Shock Matter?, with Halima Jibril and Kausik Chaudhuri (2020), Energy Policy 137, pp. 1–15.
Abstract: We examine the asymmetric effects of oil supply shocks, shocks to global real economic activity, and oil-specific demand shocks on the oil, non-oil and overall trade balances of a large sample of oil exporters and oil importers. Our empirical strategy accounts for endogenous oil prices, heterogeneous parameters, and error cross section dependence within a panel framework. We find that the pattern of asymmetries in the oil price-trade balance relationship depends on the source of the shock. For both oil exporters and oil importers, oil supply expansions are more important than oil supply disruptions; we discuss the role that Saudi Arabia plays in limiting the global effects of oil supply disruptions. Although increases in global demand deteriorate trade balances for oil importers and improve them for oil exporters, decreases in global demand have a similar, rather than an opposite effect. Our results corroborate the existing evidence that oil price increases only generate large global imbalances if they result from demand-side shocks; and we present new evidence that oil price decreases only benefit oil importers if they result from supply-side shocks.
JEL Classifications: C33, F41, Q43. O57.
Key Words: Asymmetry, oil supply, oil demand, trade balance.
Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR, with Alexander Chudik and M. Hashem Pesaran (2020), in Tong Li, M. Hashem Pesaran, and Dek Terrell (eds.), Advances in Econometrics (Volume 41): Essays in Honor of Cheng Hsiao, pp. 143–189. Emerald Publishing.
Abstract: The paper contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one third of the long-horizon forecast error variance of output growth, and about one fifth of the long run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross-country average of the median debt elasticity is 1.45 when the rise in output is due to a fiscal expansion as compared to 0.76 when the rise in output follows from a favorable output shock.
JEL Classifications: C30, E62, H6.
Key Words: Factor-augmented VARs, Global VARs, identification of global and country-specific shocks, Bayesian analysis, public debt and output growth, debt elasticity.
Supplement: Click here for the online supplement to "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR".
Dallas Fed Working Paper Version: No. 351.
Objectives, Issues, and Findings, with Jeffrey B. Nugent and Hoda Selim (2019), in Kamiar Mohaddes, Jeffrey B. Nugent, and Hoda Selim (eds.), Institutions and Macroeconomic Policies in Resource-Rich Arab Economies, pp. 1–14. Oxford University Press.
Abstract: This volume aims to improve our understanding of the problems of macroeconomic management in oil-rich Arab economies. In doing so, it emphasizes the role of institutions and the political economy environment underlying them. Most importantly, it attempts to assess the effectiveness of these institutions in delivering macroeconomic stability and growth in the face of commodity price volatility, comparing actual practice in the Arab region with the budgeting procedures and countercyclical fiscal policies and rules shown to be successful in other parts of the world. The analysis here, however, goes considerably beyond that. It utilizes a political economy perspective to explain how budgeting and other fiscal policies are designed and implemented by political and administrative actors in ways that distinguish budget surpluses from deficits and pro-cyclicality from counter-cyclicality. Second, it includes monetary institutions and exchange rate regimes, and the interactions between both of these and both fiscal and political institutions.
Key Words: Fiscal policies, fiscal institutions, exchange rate regimes, political economy, and Arab economies.
Oil, Volatility and Institutions: Cross-Country Evidence from Major Oil Producers, with Amany El-Anshasy and Jeffrey B. Nugent (2019), in Kamiar Mohaddes, Jeffrey B. Nugent, and Hoda Selim (eds.), Institutions and Macroeconomic Policies in Resource-Rich Arab Economies, pp. 52–72. Oxford University Press.
Abstract: This paper examines the long-run effects of oil revenue and its volatility on economic growth as well as the role of institutions in this relationship. We collect annual and monthly data on a sample of 17 major oil producers over the period 1961–2013, and use the standard panel autoregressive distributed lag (ARDL) approach as well as its cross-sectionally augmented version (CS-ARDL) for estimation. Therefore, in contrast to the earlier literature on the resource curse, we take into account all three key features of the panel: dynamics, heterogeneity and cross-sectional dependence. Our results suggest that (i) there is a significant negative effect of oil revenue volatility on output growth, (ii) higher growth rate of oil revenue significantly raises economic growth, and (iii) better fiscal policy (institutions) can offset some of the negative effects of oil revenue volatility. We therefore argue that volatility in oil revenues combined with poor governmental responses to this volatility drives the resource curse paradox, not the abundance of oil revenues as such.
JEL Classifications: C23, E02, F43, O13, Q32.
Key Words: Economic growth, natural resource curse, institutions, oil price volatility, oil income, macroeconomic policy.
Dallas Fed Working Paper Version: No. 310.
YouTube Video: Click here for a video recording of a talk given by Kamiar Mohaddes at the ERF and Arab Fund conference on Monetary and Fiscal Institutions in Resource-Rich Arab Economies in Kuwait.
Reforming Fiscal Institutions in Resource-Rich Arab Economies: Policy Proposals, with Jeffrey B. Nugent and Hoda Selim (2019), in Kamiar Mohaddes, Jeffrey B. Nugent, and Hoda Selim (eds.), Institutions and Macroeconomic Policies in Resource-Rich Arab Economies, pp. 237–271. Oxford University Press.
Abstract: This paper traces the evolution of fiscal institutions of Resource Rich Arab Economies (RRAEs) over time since their pre-oil days, through the discovery of oil to their build-up of oil exports. It then identifies challenges faced by RRAEs and variations in their severity among the different countries over time. Finally, it articulates specific policy reforms, which, if implemented successfully, could help to overcome these challenges. In some cases, however, these policy proposals may give rise to important trade-offs that will have to be evaluated carefully in individual cases.
JEL Classifications: E02, E62, H50, H60, H61, O53.
Key Words: Fiscal policy, fiscal institutions, fiscal sustainability, public spending efficiency, budget transparency, fiscal rules, volatility, oil curse, Arab World, oil exporters, and Middle East and North Africa.
CAMA Working Paper Version: No. 41/2018.
The U.S. Oil Supply Revolution and the Global Economy, with Mehdi Raissi (2019), Empirical Economics 57:5, pp. 1515–1546.
Abstract: This paper investigates the global macroeconomic consequences of falling oil prices due to the oil revolution in the United States, using a Global VAR model estimated for 38 countries/regions over the period 1979Q2 to 2011Q2. Set-identification of the U.S. oil supply shock is achieved through imposing dynamic sign restrictions on the impulse responses of the model. The results show that there are considerable heterogeneities in the responses of different countries to a U.S. supply-driven oil price shock, with real GDP increasing in both advanced and emerging market oil-importing economies, output declining in commodity exporters, inflation falling in most countries, and equity prices rising worldwide. Overall, our results suggest that following the U.S. oil revolution, with oil prices falling by 51 percent in the first year, global growth increases by 0.16 to 0.37 percentage points. This is mainly due to an increase in spending by oil importing countries, which exceeds the decline in expenditure by oil exporters.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, E17, F44, F47, O13, Q43.
Key Words: Tight oil, shale oil, fracking revolution, oil price decline, oil supply, global macroeconometric modeling, and international business cycle.
IMF Working Paper Version: WP/15/259.
Media Coverage: The paper was featured in the Financial Times (January 27, 2016), in an interview with Kamiar Mohaddes.
Oil Price Volatility, Financial Institutions and Economic Growth, with Uchechukwu Jarrett and Hamid Mohtadi (2019), Energy Policy 126, pp. 131–144.
Abstract: Theory attributes finance with the ability to both promote growth and reduce output volatility, and therefore increase energy security. But evidence is mixed, partly due to endogeneity effects. For example, financial institutions themselves might be a source of volatility, as the events of 2008 suggest. We address this endogeneity issue by using periods of extreme oil price volatility as a source of nearly exogenous volatility, to study the effect of finance. To do this, we develop a quasi-natural experiment and study the effect of the dramatic decline of oil prices in 2014, using a synthetic control methodology. Our hypothesis is that the ability of oil-rich countries to mitigate the effects of this decline rested on the quality of their financial institutions. We focus on 11 oil-rich countries between 2006Q1 and 2016Q4 that had “poor” measures of financial development (treatment group) out of 20 such countries and synthetically create counterfactuals from the remaining (control) group with “superior” financial development. We subject both to the oil price shock of 2014 and find evidence that better financial institutions do indeed reduce output volatility and mitigate its negative effect on growth in the year that showed a sustained decline in oil price. To address any remaining potential endogeneity between oil prices and finance, we also use a cross-sectionally augmented autoregressive distributed lag model with data on 30 oil-producing countries over the period 1980-2016, and confirm that the effects of oil volatility on growth is mitigated with better financial institutions. Our results make a strong case for the support of the positive role of financial development in improving energy security and fostering growth.
JEL Classifications: C23, F43, G20, O13, O40, Q43.
Key Words: Oil price volatility, energy security, resource curse, financial Institutions, synthetic control, and economic growth.
Cambridge Working Paper Version: CWPE 1851.
The Dynamics and Determinants of Kuwait’s Long-Run Economic Growth, with Nadeem A. Burney, Ahmad Alawadhi, and Marwa Al-Musallam (2018), Economic Modelling 71, pp. 289–304.
Abstract: This paper develops a quarterly macro-econometric model for the Kuwaiti economy estimated over the period 1979Q2-2013Q1, allowing us to investigate the long-run role of oil income in the development of Kuwait as well as the direct effects of oil revenue, foreign output, and equity price shocks on real output. More specifically, we examine to what extent Kuwaiti real output in the long run is shaped by oil revenue through their impact on capital accumulation, and technological transfers through foreign output. Using the same modelling strategy we also explore the role of oil income in terms of long-run private and public sector output growth (separately). The estimates suggest that real domestic output in the long run is influenced by oil revenues and foreign output (a proxy for technological progress), and technological growth in Kuwait is on a par with the rest of the world. Furthermore, while we show that both oil revenues and foreign output drive growth in the public sector, it seems that technological progress is the main (and only) driver for private sector real growth. Finally, our results show that oil revenue and global equity market shocks have a large and significant long-run impact on Kuwait's real output and public sector GDP. In comparison, the effects of the foreign output shock is muted.
JEL Classifications: C32, C53, E17, F43, F47, Q32.
Key Words: Growth models, long-run relations, oil exporters, Kuwaiti economy, oil revenue and foreign output shocks.
Working Paper Version: October 29, 2017.
Rising Public Debt to GDP Can Harm Economic Growth, with Alexander Chudik, M. Hashem Pesaran, and Mehdi Raissi (2018), Economic Letter, Federal Reserve Bank of Dallas, 13:3, pp. 1–4.
Abstract: The debt–growth relationship is complex, varying across countries and affected by global factors. While there is no simple universal threshold above which debt to GDP significantly depresses growth, high and rising public debt burdens slow growth in the long term, data from the past four decades indicate.
Kuwait’s Macroeconomic Performance in the Global Context, with Ahmad Alawadhi, Nadeem A. Burney, and Ahmed Al-Khayat (2018), Arab Journal of Administrative Sciences 25:1, pp. 93–119.
Abstract: This paper disentangles the size and speed of the transmission of different global macroeconomic shocks originating from three systemic countries (China, Euro Area, and the US) to the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE). It also investigates the implications of shocks to both global equity and oil markets for the Kuwaiti and the other Gulf Cooperation Council (GCC) economies. Based on a Global VAR model estimated for 28 countries/regions over the period 1979Q2 to 2013Q1, our results show that US GDP, oil price, and equity market shocks have permanent and statistically significant long-run impacts on Kuwait’s real output and oil production (taking account of both direct exposures of Kuwait to these shocks and indirect effects through third-markets). These impacts are very similar for the rest of the GCC countries. Our results illustrate the importance of modeling the economy of Kuwait, and of the GCC countries in general, in a global context, taking into account spillover effects from trading partners as well as global equity markets rather than just focusing on the oil market, which is what has traditionally been done.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, E17, E32, F44, O53, Q41.
Key Words: Global VAR (GVAR), interconnectedness, global macroeconomic modeling, impulse responses, macroeconomic shocks, international business cycle, Kuwait, and Gulf Cooperation Council Countries.
Do Sovereign Wealth Funds Dampen the Negative Effects of Commodity Price Volatility?, with Mehdi Raissi (2017), Journal of Commodity Markets 8, pp. 18–27.
Abstract: This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981-2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the impact is dampened if a country has a SWF and a better institutional quality (hence a more stable government expenditure).
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C23, E32, F43, O13, O40.
Key Words: Economic growth, commodity prices, volatility, and sovereign wealth funds
Dallas Fed Working Paper Version: No. 304.
Commodity Term of Trade (CToT) Data: Click here for the package containing annual data from 1981 to 2014 on growth rate of commodity terms of trade (CToT) and realized CToT volatility for 163 countries.
Can Italy Grow Out of Its NPL Overhang? A Panel Threshold Analysis, with Mehdi Raissi and Anke Weber (2017), Economics Letters 159, pp. 185–189.
Abstract: This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997-2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long-standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term.
JEL Classifications: C23, E44, G33.
Key Words: Italy, non-performing loans, real output growth, panel tests of threshold effects.
IMF Working Paper Version: WP/17/66.
Media Coverage: The paper was featured in a number of Italian newspapers.
Slides: Click here for the slides used in the AEA hosted session "Non-Performing Loans: Causes, Effects and Remedies", presented at the 2018 ASSA Annual Meeting.
Oil Prices and the Global Economy: Is It Different This Time Around?, with M Hashem Pesaran (2017), Energy Economics 65, pp. 315–325.
Abstract: The recent plunge in oil prices has brought into question the generally accepted view that lower oil prices are good for the US and the global economy. In this paper, using a quarterly multi-country econometric model, we first show that a fall in oil prices tends relatively quickly to lower interest rates and inflation in most countries, and increase global real equity prices. The effects on real output are positive, although they take longer to materialize (around 4 quarters after the shock). We then re-examine the effects of low oil prices on the US economy over different sub-periods using monthly observations on real oil prices, real equity prices and real dividends. We confirm the perverse positive relationship between oil and equity prices over the period since the 2008 financial crisis highlighted in the recent literature, but show that this relationship has been unstable when considered over the longer time period of 1946--2016. In contrast, we find a stable negative relationship between oil prices and real dividends which we argue is a better proxy for economic activity (as compared to equity prices). On the supply side, the effects of lower oil prices differ widely across the different oil producers, and could be perverse initially, as some of the major oil producers try to compensate their loss of revenues by raising production. Taking demand and supply adjustments to oil price changes as a whole, we conclude that oil markets equilibrate but rather slowly, with large episodic swings between low and high oil prices.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, E17, E32, F44, F47, O51, Q43.
Key Words: Oil prices, equity prices, dividends, economic growth, oil supply, global oil markets, and international business cycle.
Working Paper Version: May 6, 2017.
Media Coverage: See also our article on Is Cheap Oil Really Good for the Global Economy? published in the Financial Times (July 14, 2016). The paper was also featured in Sputnik (January 26, 2017), in an interview with Kamiar Mohaddes.
YouTube Video: Click here for a video recording of a lecture given by M. Hashem Pesaran based on this paper.
China's Slowdown and Global Financial Market Volatility: Is World Growth Losing Out?, with Paul Cashin and Mehdi Raissi (2017), Emerging Markets Review 31, pp. 164–175.
Abstract: China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.
JEL Classifications: C32, E32, F44, O53.
Key Words: China's slowdown, global financial market volatility, international business cycle, and Global VAR.
Working Paper Version: February 25, 2017.
Fair Weather or Foul? The Macroeconomic Effects of El Niño, with Paul Cashin and Mehdi Raissi (2017), Journal of International Economics 106, pp. 37–54.
Abstract: This paper employs a dynamic multi-country framework to analyze the international macroeconomic transmission of El Niño weather shocks. This framework comprises 21 country/region-specific models, estimated over the period 1979Q2 to 2013Q1, and accounts for not only direct exposures of countries to El Niño shocks but also indirect effects through third-markets. We contribute to the climate-macroeconomy literature by exploiting exogenous variation in El Niño weather events over time, and their impact on different regions cross-sectionally, to causatively identify the effects of El Niño shocks on growth, inflation, energy and non-fuel commodity prices. The results show that there are considerable heterogeneities in the responses of different countries to El Niño shocks. While Australia, Chile, Indonesia, India, Japan, New Zealand and South Africa face a short-lived fall in economic activity in response to an El Niño shock, for other countries, an El Niño occurrence has a growth-enhancing effect; some (for instance the U.S.) due to direct effects while others (for instance the European region) through positive spillovers from major trading partners. Furthermore, most countries in our sample experience short-run inflationary pressures as both energy and non-fuel commodity prices increase. Given these findings, macroeconomic policy formulation should take into consideration the likelihood and effects of El Niño episodes.
JEL Classifications: C32, F44, O13, Q54.
Key Words: El Niño weather shocks, oil and non-fuel commodity prices, global macroeconometric modeling, international business cycle.
Working Paper Version: January 23, 2017.
Media Coverage: This paper has been covered extensively in major international news outlets including Bloomberg, the Economist, the Financial Times, the New York Times, the Wall Street Journal, the New Scientist, the Time Magazine, the Associated Press and the Washington Post. It has also been featured in national news agencies in Australia, China, India, Japan, New Zealand, the United Kingdom, and the United States, to name a few. The paper was also highlighted in Ken Rogoff's opinion piece on Extreme Weather and Global Growth.
YouTube Video: Click here for a video recording of a talk given by Kamiar Mohaddes at the 13th Research Meeting of the National Institute of Public Finance and Policy and the Department of Economic Affairs of the Ministry of Finance in India.
CCTV America Interview: Click here to see the CCTV America interview with Kamiar Mohaddes.
BBC Interview: Click here or here to listen to the BBC interview with Kamiar Mohaddes.
The Heat Program Interview: Click here to see CCTV America's The Heat Program: El Niño and its Global Effects, on which Kamiar Mohaddes featured as a panelist.
Translation into other languages: You can also read a short version of the IMF Working Paper version in Arabic, French, Russian, and Spanish. A summary of the paper is also available in Persian.
Is There a Debt-Threshold Effect on Output Growth?, with Alexander Chudik, M. Hashem Pesaran, and Mehdi Raissi (2017), Review of Economics and Statistics 99:1, pp. 135–150.
Abstract: This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965-2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers.
JEL Classifications: C23, E62, F34, H6.
Key Words: Panel tests of threshold effects, long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence, debt, and inflation.
Supplement: Click here for the online supplement to "Is There a Debt-Threshold Effect on Output Growth?".
Dallas Fed Working Paper Version: No. 245.
Matlab Codes for the CS-DL Estimators: Click here for the Matlab codes for the cross-sectionally augmented distributed lag (CS-DL) Mean Group and Pooled estimators.
Matlab Codes for Panel Tests of Threshold Effects: Click here for the Matlab codes to test for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors.
Media Coverage: The paper was featured in the Financial Times (May 3, 2017).
Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis, with M. Hashem Pesaran (2016), Energy Economics 59, pp. 382–399.
Abstract: This paper investigates the global macroeconomic consequences of country-specific oil-supply shocks. Our contribution is both theoretical and empirical. On the theoretical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply shocks (due to, for instance, sanctions, wars, or natural disasters) vary considerably depending on which country is subject to the shock. In particular, we find that adverse shocks to Iranian oil output are neutralized in terms of their effects on the global economy (real outputs and financial markets) mainly due to an increase in Saudi Arabian oil production. In contrast, a negative shock to oil supply in Saudi Arabia leads to an immediate and permanent increase in oil prices, given that the loss in Saudi Arabian production is not compensated for by the other oil producers. As a result, a Saudi Arabian oil supply shock has significant adverse effects for the global economy with real GDP falling in both advanced and emerging economies, and large losses in real equity prices worldwide.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, E17, F44, F47, O53, Q43.
Key Words: Country-specific oil supply shocks, identification of shocks, oil sanctions, oil prices, global oil markets, Iran, Saudi Arabia, international business cycle, Global VAR (GVAR), interconnectedness, impulse responses.
Working Paper Version: July 25, 2016.
Data Files: Click here for the data as well as links to the Matlab files needed to compute the statistics and results in the empirical section of "Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis".
Media Coverage: The paper was featured in Tejarat-e Farda Issue 108, pp. 46–49 (November 8, 2014), in an interview with M. Hashem Pesaran and in Tejarat-e Farda Issue 109, pp. 82–83 (November 15, 2014), in an interview with Kamiar Mohaddes.
El Niño: Good Boy or Bad?, with Paul Cashin and Mehdi Raissi (2016), Finance & Development 53:1, pp. 30–33.
Abstract: El Niño has important effects on the world's economies–and not all of them are bad.
Translation into other languages: This paper is also available in Arabic, French, Russian, and Spanish.
The Global Impact of the Systemic Economies and MENA Business Cycles, with Paul Cashin and Mehdi Raissi (2016), in Ibrahim Ahmed Elbadawi and Hoda Selim (eds.), Understanding and Avoiding the Oil Curse in Resource-Rich Arab Economies, pp. 16–43, Cambridge University Press.
Abstract: This paper analyzes spillovers from macroeconomic shocks in systemic economies (China, the Euro Area, and the United States) to the Middle East and North Africa (MENA) region as well as outward spillovers from a GDP shock in the Gulf Cooperation Council (GCC) countries and MENA oil exporters to the rest of the world. This analysis is based on a Global Vector Autoregression (GVAR) model, estimated for 38 countries/regions over the period 1979Q2 to 2011Q2. Spillovers are transmitted across economies via trade, financial, and commodity price linkages. The results show that the MENA countries are more sensitive to developments in China than to shocks in the Euro Area or the United States, in line with the direction of evolving trade patterns and the emergence of China in the global economy as a major player. Outward spillovers from the GCC region and MENA oil exporters are likely to be stronger in their immediate geographical proximity, but also have global implications.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, E17, E32, F44, O53, Q41.
Key Words: Global VAR (GVAR), interconnectedness, global macroeconomic modeling, impulse responses, macroeconomic shocks, international business cycle, China, Euro Area, USA, Gulf Cooperation Council Countries, and the MENA region.
IMF Working Paper Version: WP/12/255.
Long-Run Effects in Large Heterogeneous Panel Data Models with Cross-Sectionally Correlated Errors, with Alexander Chudik, M. Hashem Pesaran, and Mehdi Raissi (2016), in R. Carter Hill, Gloria Gonzalez-Rivera, and Tae-Hwy Lee (eds.), Advances in Econometrics (Volume 36): Essays in Honor of Aman Ullah, pp. 85–135. Emerald Publishing.
Abstract: This paper develops a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in large dynamic heterogeneous panel data models with cross-sectionally dependent errors. The asymptotic distribution of the CS-DL estimator is derived under coefficient heterogeneity in the case where the time dimension (T) and the cross-section dimension (N) are both large. The CS-DL approach is compared with more standard panel data estimators that are based on autoregressive distributed lag (ARDL) specifications. It is shown that unlike the ARDL type estimator, the CS-DL estimator is robust to misspecification of dynamics and error serial correlation. The theoretical results are illustrated with small sample evidence obtained by means of Monte Carlo simulations, which suggest that the performance of the CS-DL approach is often superior to the alternative panel ARDL estimates particularly when T is not too large and lies in the range of 30≤T<100.
JEL Classifications: C23.
Key Words: Long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence.
Dallas Fed Working Paper Version: No. 223.
Matlab Codes for the CS-DL Estimators: Click here for the Matlab codes for the cross-sectionally augmented distributed lag (CS-DL) Mean Group and Pooled estimators.
Does Inflation Slow Long-Run Growth in India?, with Mehdi Raissi (2016), in Rahul Anand and Paul Cashin (eds.), Taming Indian Inflation, pp. 115–129. International Monetary Fund, Washington, DC.
Abstract: This paper examines the long-run relationship between consumer price index industrial workers (CPI-IW) inflation and GDP growth in India. We collect data on a sample of 14 Indian states over the period 1989–2013, and use the cross-sectionally augmented distributed lag (CS-DL) approach of Chudik et al. (2013) as well as the standard panel ARDL method for estimation––to account for cross-state heterogeneity and dependence, dynamics and feedback effects. Our findings suggest that, on average, there is a negative long-run relationship between inflation and economic growth in India. We also find statistically-significant inflation-growth threshold effects in the case of states with persistently-elevated inflation rates of above 5.5 percent. This suggest the need for the Reserve Bank of India to balance the short-term growth-inflation trade-off, in light of the long-term negative effects on growth of persistently-high inflation.
JEL Classifications: C23, E31, O40.
Key Words: India, inflation, growth, threshold effects, cross-sectional heterogeneity and dependence.
IMF Working Paper Version: WP/14/222.
Media Coverage: The paper was featured in an article in the Mint newspaper (December 22, 2014).
Commodity Price Volatility and the Sources of Growth, with Tiago V. de V. Cavalcanti and Mehdi Raissi (2015), Journal of Applied Econometrics 30:6, pp. 857–873.
Abstract: This paper studies the impact of the level and volatility of the commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We use the standard system GMM approach as well as a cross-sectionally augmented version of the pooled mean group (CPMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970--2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of commodity terms of trade volatility offset the positive impact of commodity booms; and export diversification of primary commodity abundant countries contribute to faster growth. Therefore, we argue that volatility, rather than abundance per se, drives the "resource curse" paradox.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C23, F43, O13, O40.
Key Words: Growth models, resource curse, commodity prices, volatility.
Data Supplement: Click here for the online data supplement to "Commodity Price Volatility and the Sources of Growth".
Data: Click here for the data used in this paper.
IMF Working Paper Version: WP/12/12.
The Differential Effects of Oil Demand and Supply Shocks on the Global Economy, with Paul Cashin, Maziar Raissi, and Mehdi Raissi (2014), Energy Economics 44, pp. 113–134.
Abstract: We employ a set of sign restrictions on the impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2-2011Q2, as well as bounds on impact price elasticities of oil supply and oil demand to discriminate between supply-driven and demand-driven oil-price shocks, and to study the time profile of their macroeconomic effects across a wide range of countries and real/financial variables. We show that the above identification scheme can greatly benefit from the cross-sectional dimension of the GVAR by providing a large number of additional cross-country sign restrictions and hence reducing the set of admissible models. The results indicate that the economic consequences of a supply-driven oil-price shock are very different from those of an oil-demand shock driven by global economic activity, and vary for oil-importing countries compared to energy exporters. While oil importers typically face a long-lived fall in economic activity in response to a supply-driven surge in oil prices, the impact is positive for energy-exporting countries that possess large proven oil/gas reserves. However, in response to an oil-demand disturbance, almost all countries in our sample experience long-run inflationary pressures, an increase in real output, a rise in interest rates, and a fall in equity prices.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, E17, F44, F47, Q41.
Key Words: Global VAR (GVAR), interconnectedness, global macroeconomic modeling, sign restrictions, impulse responses, international business cycle, oil-demand and oil-supply shocks.
Working Paper Version: March 18, 2014.
Media Coverage: The paper was featured in an IMF blog (iMFdirect) about the recent oil price slump by Rabah Arezki and Olivier Blanchard (December 22, 2014).
An Empirical Growth Model for Major Oil Exporters, with Hadi Salehi Esfahani and M. Hashem Pesaran (2014), Journal of Applied Econometrics 29:1, pp. 1–21.
Abstract: This paper develops a long-run output relation for a major oil exporting economy where the oil income to output ratio remains sufficiently high over a prolonged period. It extends the stochastic growth model developed in Binder and Pesaran (1999) by including oil exports as an additional factor in the capital accumulation process. The paper distinguishes between the two cases where the growth of oil income, g°, is less than the natural growth rate (the sum of the population growth, n, and the growth of technical progress, g), and when g° ≥ g+n. Under the former, the effects of oil income on the economy's steady growth rate will vanish eventually, whilst under the latter, oil income enters the long-run output equation with a coefficient which is equal to the share of capital if it is further assumed that the underlying production technology can be represented by a Cobb-Douglas production function. The long-run theory is tested using quarterly data on nine major oil economies. Overall, the test results support the long-run theory, with the existence of long-run relations between real output, foreign output and real oil income established for six of the nine economies considered.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, C53, E17, F43, F47, Q32.
Key Words: Growth models, long run and error correcting relations, major oil exporters, OPEC member countries, oil exports and foreign output shocks.
Working Paper Version: June 4, 2012.
Data and Microfit Files: Click here for the data as well as the list and equation files to transform the data and compute the statistics and results in "An Empirical Growth Model for Major Oil Exporters".
One Hundred Years of Oil Income and the Iranian Economy: A Curse or a Blessing?, with M. Hashem Pesaran (2014), in Parvin Alizadeh and Hassan Hakimian (eds.), Iran and the Global Economy: Petro Populism, Islam and Economic Sanctions. Routledge, London.
Abstract: This paper examines the impact of oil revenues on the Iranian economy over the past hundred years, spanning the period 1908-2010. It is shown that although oil has been produced in Iran over a very long period, its importance in the Iranian economy was relatively small up until the early 1960s. It is argued that oil income has been both a blessing and a curse. Oil revenues when managed appropriately are a blessing, but their volatility (which in Iran is much higher than oil price volatility) can have adverse effects on real output, through excessively high and persistent levels of inflation. Lack of appropriate institutions and policy mechanisms which act as shock absorbers in the face of high levels of oil revenue volatility have also become a drag on real output. In order to promote growth, policies should be devised to control inflation; to serve as shock absorbers negating the adverse effects of oil revenue volatility; to reduce rent seeking activities; and to prevent excessive dependence of government finances on oil income.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: E02, N15, Q32.
Key Words: Oil price volatility, oil income, rent seeking, inflation, macroeconomic policy.
Working Paper Version: February 16, 2013.
Oil Prices, External Income, and Growth: Lessons from Jordan, with Mehdi Raissi (2013), Review of Middle East Economics and Finance 9:2, pp. 99–131.
Abstract: This paper extends the long-run growth model of Esfahani et al. (2012) to a labor exporting country that receives large inflows of external income—the sum of remittances, FDI and general government transfers—from major oil-exporting economies. The theoretical model predicts real oil prices to be one of the main long-run drivers of real output. Using quarterly data between 1979 and 2009 on core macroeconomic variables for Jordan and a number of key foreign variables, we identify two long-run relationships: an output equation as predicted by theory and an equation linking foreign and domestic inflation rates. It is shown that real output in the long run is shaped by: (i) oil prices through their impact on external income and in turn on capital accumulation, and (ii) technological transfers through foreign output. The empirical analysis of the paper confirms the hypothesis that a large share of Jordan's output volatility can be associated with fluctuations in net income received from abroad. External factors, however, cannot be relied upon to provide similar growth stimuli in the future, and therefore it will be important to diversify the sources of growth in order to achieve a high and sustained level of income.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, C53, E17, F43, F47, Q32.
Key Words: Growth models, long run relations, Jordanian economy, remittances, FDI, oil price shocks, foreign output and inflation shocks, and error correcting relations.
IMF Working Paper Version: WP/11/291.
Oil Exports and the Iranian Economy, with Hadi Salehi Esfahani and M. Hashem Pesaran (2013), The Quarterly Review of Economics and Finance 53:3, pp. 221–237.
Abstract: This paper presents an error-correcting macroeconometric model for the Iranian economy estimated using a new quarterly data set over the period 1979Q1-2006Q4. It builds on a recent paper by the authors, Esfahani et al. (2015), which develops a theoretical long-run growth model for major oil exporting economies. The core variables included in this paper are real output, real money balances, inflation, exchange rate, oil exports, and foreign real output, although the role of investment and consumption are also analyzed in a sub-model. The paper finds clear evidence for the existence of two long-run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. The results show that real output in the long run is influenced by oil exports and foreign output. However, it is also found that inflation has a significant negative long-run effect on real GDP, which is suggestive of economic inefficiencies and is matched by a negative association between inflation and the investment-output ratio. Finally, the results of impulse responses show that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C32, C53, E17, F43, F47, Q32.
Key Words: Growth models, long-run relations, oil exporters, Iranian economy, oil price and foreign output shocks, and error-correcting relations.
Working Paper Version: July 4, 2012.
Data and Microfit Files: Click here for the raw data as well as the list and equation files to transform the data and compute the statistics and results in "Oil Exports and the Iranian Economy".
Translation into Persian: Oil Exports and the Iranian Economy (Persian).
Econometric Modelling of World Oil Supplies: Terminal Price and the Time to Depletion (2013), OPEC Energy Review 37:2, pp. 162–193.
Abstract: This paper develops a novel approach by which to identify the price of oil at the time of depletion; the so-called "terminal price" of oil. It is shown that while the terminal price is independent of both GDP growth and the price elasticity of energy demand, it is dependent on the world real interest rate and the total life-time stock of oil resources, as well as on the marginal extraction and scarcity cost parameters. The theoretical predictions of this model are evaluated using data on the cost of extraction, cumulative production, and proven reserves. The predicted terminal prices seem sensible for a range of parameters and variables, as illustrated by the sensitivity analysis. Using the terminal price of oil, we calculate the time to depletion, and determine the extraction and price profiles over the life-time of the resource. The extraction profiles generated seem to be in line with the actual production and the predicted prices are generally in line with those currently observed.
Arabic Abstract: Click here for the Abstract in Arabic.
JEL Classifications: C23, Q31, Q47.
Key Words: Oil prices and extraction, terminal price of oil, time to depletion, nonrenewable resources, oil demand estimations, and oil extraction costs.
Working Paper Version: January 13, 2013.
Inflation Differentials in the GCC: Does the Oil Cycle Matter?, with Oral H. Williams (2013), Middle East Development Journal 5:2, pp. 1–23 .
Abstract: This paper uses a pairwise approach to investigate the main factors that have been driving inflation differentials in the Gulf Cooperation Council (GCC) region for the past two decades. The results suggest that inflation differentials in the GCC are largely influenced by the oil cycle, mainly through the credit and fiscal channels. This implies that in order for the proposed monetary union to be successful, closer coordination of fiscal policies will be critical. The results also indicate that after controlling for cyclical factors, convergence increased even during the recent oil boom.
JEL Classifications: C32, C33, E31, E50.
Key Words: Inflation differentials, convergence, oil prices, panel data, pairwise approach, monetary union, and Gulf Cooperation Council (GCC) countries.
IMF Working Paper Version: WP/11/294.
Growth, Development and Natural Resources: New Evidence Using a Heterogeneous Panel Analysis, with Tiago V. de V. Cavalcanti and Mehdi Raissi (2011), The Quarterly Review of Economics and Finance 51:4, pp. 305–318.
Abstract: This paper explores whether natural resource abundance is a curse or a blessing. To do so, we firstly develop a theory consistent econometric model, in which we show that there is a long run relationship between real income, the investment rate, and the real value of oil production. Secondly, we investigate the long-run (level) impacts of natural resource abundance on domestic output as well as the short-run (growth) effects. Thirdly, we explicitly recognize that there is a substantial cross-sectional dependence and cross-country heterogeneity in our sample, which covers 53 oil exporting and importing countries with very different historical and institutional backgrounds, and adopt the non-stationary panel methodologies developed by Pesaran (2006) and Pedroni (2000) for estimation. Our results, using the real value of oil production, rent or reserves as a proxy for resource endowment, reveal that oil abundance has a positive effect on both income levels and economic growth. While we accept that oil rich countries could benefit more from their natural wealth by adopting growth and welfare enhancing policies and institutions, we challenge the common view that oil abundance affects economic growth negatively.
JEL Classifications: C23, O13, O40, Q32.
Key Words: Growth models, natural resource curse, cointegration, cross sectional dependence, common correlated effects, and oil.
Working Paper Version: July 10, 2011.
Data: Click here for the data used in this paper. You can replicate the results in Tables 4 and 8 by using these codes and amending the 4 lines relating to the folder that the data needs to be read from as well as the range and the relevant sheet of the .xls file provided.
Does Oil Abundance Harm Growth?, with Tiago V. de V. Cavalcanti and Mehdi Raissi (2011), Applied Economics Letters 18:12, pp. 1181–1184.
Abstract: This article explores whether natural resource abundance is a curse. Our results reveal that oil abundance has a positive effect on both long-run income levels and short-run economic growth.
In the News: Benefits by the barrel.