Most tax systems create a tax bias toward debt finance. Such debt bias increases leverage and may negatively affect financial stability. This paper models and estimates debt bias in the financial sector, and present novel estimates for investment banks and non-bank financial intermediaries such as finance and insurance companies. We find debt bias to be pervasive, explaining as much as 10 percent of total leverage for regular banks and 20 percent for investment banks, with the effects most pronounced before the global financial crisis. Going forward, debt bias is likely to once again gain prominence as a key driver of leverage decisions, underscoring the importance of policy reform at this juncture.
We study the effects of oil-price shocks on the U.S. economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to separate exogenous oil-supply shocks from endogenous oil-price fluctuations driven by changes in oil demand.
This paper documents the determinants of real oil price in the global market based on
SVAR model embedding transitory and permanent shocks on oil demand and supply as
well as speculative disturbances. We find evidence of significant differences in the
propagation mechanisms of transitory versus permanent shocks, pointing to the
importance of disentangling their distinct effects. Permanent supply disruptions turn out to
be a bigger factor in historical oil price movements during the most recent decades, while
speculative shocks became less influential.
The recent plunge in oil prices has brought into question the generally accepted view that lower
oil prices are good for the United States 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 four quarters
after the shock). We then re-examine the effects of low oil prices on the U.S. 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.
Mr. Paul Cashin, Mr. Kamiar Mohaddes, and Mr. Mehdi Raissi
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 as a key driver of the global economy. 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.
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.
Mr. Paul Cashin, Mr. Kamiar Mohaddes, Mr. Mehdi Raissi, and Maziar Raissi
We employ a set of sign restrictions on the generalized impulse responses of a Global VAR model, estimated for 38 countries/regions over the period 1979Q2–2011Q2, to discriminate between supply-driven and demand-driven oil-price shocks and to study the time profile of their macroeconomic effects for different countries. 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 and a short-run increase in real output.