Kamiar Mohaddes Profile picture
Sep 25, 2020 23 tweets 22 min read Read on X
What are the implications of excess global financial market volatility on economic growth? Are there threshold effects in the relationship between growth & excess global volatility for individual countries? How should we model the nonlinear effects in a multi-country setting? 1/n
We answer these questions in recent work with Alexander Chudik @DallasFed, M Hashem Pesaran @USCDornsife @TrinCollCam, @mraissi80 @IMFNews & @arebucci1 @JHUCarey @cepr_org @nberpubs: ideas.repec.org/p/cam/camdae/2… #TGVAR 2/n
The #Covid19 #pandemic has been a shock like no other, initiating simultaneous demand and supply disruptions. In addition, it led to a sharp tightening in global #financial market conditions during the first quarter of 2020. 3/n Image
Using quarterly data over the past four decades, we show that global #financial market volatility (beyond certain thresholds) can adversely affect economic #growth in a significant majority (80%) of advanced countries and for several emerging market economies (see Table 1). 4/n Image
There are numbers of channels through which excessive global #financial market #volatility can adversely affect economic #growth. They include higher precautionary #savings by households, lower or delayed #investment by firms due to increased #uncertainty & ... 5/n
weaker demand prospects, & a higher cost of raising capital owing to higher funding costs in a #volatile environment.

In normal conditions where global #volatility is low, #financial markets are able to price the volatility #risk, & therefore weaken the relationship between 6/n
output growth & the volatility factor. But during periods of heightened volatility, that occur very rarely, it is difficult to price the volatility risk properly & it is thus more likely for excess volatility to show up as statistically significant in output growth equations. 7/n
While we manage to detect threshold effects in the output #growth-global #volatility relationship in many advanced economies (80% of cases), similar results for emerging markets are less pervasive (with threshold effects being statistically significant in 30% of cases) for... 8/n Image
the following reason. Compared to advanced countries, exposure to global #equity markets is lower in emerging market economies (that is, they have less developed #capital markets and rely more on the #banking sector for #credit intermediation). Nonetheless, in these...9/n
countries output growth could well be nonlinearly affected by localized events (e.g., natural disasters; #banking, #currency and sovereign #crises) or external shocks (e.g., #commodity price #volatility and #capital flow reversals), & be exacerbated by country-specific...10/n
characteristics (internal & external imbalances). However, these types of threshold effects wont be captured by our econometric specification that focuses on the global realized #volatility of #equity returns that is more reflective of developments in advanced economies. 11/n
Our findings underscore the importance of allowing for threshold effects in studying the #macroeconomic consequences of #Covid19, which, considering its unprecedented nature, generated a sharp tightening in global #financial conditions. 12/n Image
Specifically, global #equity markets sold off sharply through mid-March as the #pandemic spread across the world. From end-2019 to trough, the S&P 500 index in the United States fell 30%. #Stock prices in other major economies experienced declines of similar magnitude & ... 13/n Image
flight to safety resulted in sharp capital outflows from emerging market economies. Notwithstanding the improvement in global risk sentiment since March amid large-scale liquidity injections by major central banks and a gradual relaxation of lockdowns in many countries, ... 14/n Image
output recovery is expected to be gradual with #GDP growth in many economies expected to be negatively affected by the previous bout of #financial market #volatility (see Figure 2). 15/n Image
Given the importance of allowing for threshold effects in studying the macroeconomic consequences of #Covid19, in Sections 3 & 4 of our paper we develop a threshold-augmented dynamic multi-country framework (what we call #TGVAR), to study the implications of #Covid19. 16/n Image
Our counterfactual results show that the #pandemic will likely reduce the world real GDP by 3 percent below its model-generated path without the shock by the end of 2021. While #China and other emerging #Asian economies are estimated to be less severely affected, ... 17/n Image
the United States, the #UK, and several other advanced economies may experience deeper and longer-lasting effects. Among non-#Asian #emerging market economies, however, the economic impact of #Covid19 varies substantially, depending on domestic factors (economic structures...18/n Image
... #health preparedness, and #lockdowns) as well as external disturbances (plunging #trade, collapsing #tourism, #capital outflows, falling #commodity prices). There is a significant degree of uncertainty around all these counterfactual outcomes which we quantify. 19/n
Importantly, our findings underscore the role of spillovers which we quantify for the case of #Sweden considering its different approach toward the #pandemic. We show that no country is #immune to the #economic fallout of the pandemic because of #interconnections. 20/n Image
We also estimate that the #Covid19 #pandemic will likely lower long-term interest rates by about 100 basis points below their historical lows in core advanced #economies. 21/n Image
In contrast, the impact on long-term interest rates in #emerging market #economies has a wide range, including significant upside #risks, with implications for #debt servicing costs in these economies. 22/n Image
Our findings highlight the importance of policy interventions to restore the normal functioning of #financial markets & adopting other measures (fiscal & liquidity) that can limit bankruptcies of viable firms & support incomes of households, limiting the amount of #scarring. 23/n

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More from @KamiarMohaddes

Jun 11, 2021
Super excited to see our paper on #Covid19 #Fiscal Support and its Effectiveness, with Alexander Chudik @DallasFed & @mraissi80 @IMFNews, out in Economics Letters. You can read it (free access) from here: authors.elsevier.com/c/1dDlMbZedt0om #TGVAR 1/n Image
With new variants/waves & reimposition of restrictions in some regions, governments around the world are calling for a careful assessment of the effectiveness of the adopted #Covid19 #fiscal measures before they embark on further easing or tailoring of measures 2/n
The #Covid19 pandemic led to a sharp tightening of global #financial conditions at the acute phase of the crisis and has inflicted large economic losses across the world (see Figure below) ... 3/n Image
Read 28 tweets
Sep 18, 2020
In a recent paper, with Alexander Chudik @DallasFed, M Hashem Pesaran @USCDornsife, @mraissi80 @IMFNews & @arebucci1 @JHUCarey, we develop a threshold-augmented dynamic multi-country model (#TGVAR) to quantify the #macroeconomic effects of #Covid19: econ.cam.ac.uk/research/cwpe-… 1/n Image
Key challenges with the empirical #economic analysis of #Covid19 include the following: how to identify the shock, how to account for its non-linear effects, & how to quantify its effects while accounting for spillovers, common global factors, network effects and uncertainty. 2/n
We contribute to the literature by addressing these issues in a coherent multi-country framework. We offer an identification strategy for the #Covid19 shock considering that a synthetic control method cannot be applied in the context of a global #pandemic. 3/n
Read 23 tweets
Jul 3, 2020
Looking forward to chatting with potential @Cambridge_Uni economics candidates later today and answering any questions you have about #economics at #Cambridge (one of the oldest economics faculties in the world) or the wonderful @Kings_College.
Did you know that @Kings_College has a long tradition in #economics?

It has been the home of many great economists, such as Richard Kahn, Nicholas Kaldor, John Maynard Keynes, Arthur Cecil Pigou, Joan Robinson, Richard Stone and Oliver Hart to name a few. Image
Among @Cambridge_Uni Colleges, at King's we currently have one of the largest number of #economics Fellows, including my amazing colleagues Aytek Erdil, @elisafaraglia, @giannitsarou & Hamid Sabourian (with super interesting research interests from macroeconomics to game theory). Image
Read 4 tweets
May 28, 2020
The latest issue of our #MiddleEast #Development Journal is now out, with 9 fantastic papers covering a number of urgent issues in the #MENA region, including #inequality, #SWFs. #trade and the future of #jobs: tandfonline.com/toc/rmdj20/12/… #MEJD @econromesh @ChahirZaki @Hanomics2
Sovereign wealth funds and cross-border investment bias: the case of #Arab countries by Ibrahim Elbadawi @ERFlatest, Raimundo Soto @ucatolica & @ChahirZaki @CairoUniv @EMNESorg: doi.org/10.1080/179381… 1/9 #MEDJ Image
Equivalence scales and the change in poverty levels across time: #Turkish case by Burcay Erus @UniBogazici: tandfonline.com/doi/full/10.10… 2/9 #MEDJ Image
Read 10 tweets
May 20, 2020
Like my friend Thomas, I keep getting sent articles about our teaching @Cambridge_Uni next academic year and people emailing to ask about the articles, please don’t jump to conclusions! 1/n
Sorry, started the thread and then had to go back to #homeschooling, but back now 😀 2/n
First of all this about large scale lectures. They will be online. But surely all other universities will do the same?! 3/n
Read 5 tweets
May 15, 2020
Just had our first virtual International #Iranian Economic Association (IIEA) Board Meeting. Great to connect with Board members from #Virginia, #Ohio, #Massachusetts, #Germany, #Qatar, #NewJersey, #California & the #UK. Look out for interesting #IIEA webinars soon. ImageImage
Due to the novel #coronavirus (#COVID19) pandemic , the IIEA Board has reluctantly decided to postpone the Seventh International Conference on #Iran’s Economy (#IIEA2020) originally planned to be held at the Middle Eastern Studies Department, @CHSS_HBKU, @HBKU. #اقتصاد #ایران
In due course, we shall issue a new call for papers for the Seventh International Conference on #Iran’s Economy, which is planned to be held in 2021 (#IIEA2021). #اقتصاد #ایران Image
Read 4 tweets

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