The Unassuming Economist

From a paper by Abhishek Halder and M. Kannadhasan:

“The growing concern over energy security has raised critical questions about the role of energy uncertainty in shaping firm-level outcomes. While prior research underscores the importance of energy uncertainty, there is limited understanding of its impact on corporate bankruptcy risk, particularly in a cross-country context. This paper presents the first empirical evidence of the relationship between energy uncertainty and corporate bankruptcy risk using a sample of listed firms from 28 countries. The findings reveal that energy uncertainty escalates bankruptcy risk, which is consistent with resource dependency, agency and pecking order theories. Contracting profit margins and surging cost of debt are two intervening mechanisms through which energy uncertainty adversely impacts bankruptcy risk, indicating that heightened costs associated with operating and financing activities inflates financial distress. We also unveil that a conservative working capital policy and superior working capital efficiency diminish the detrimental impact of energy uncertainty. Our sub-sample analyses divulges that this detrimental impact is stronger in firms operating in high energy-consuming and cyclical sectors, and in those based in energy exporting and high energy-intensity countries. Furthermore, at low levels of energy uncertainty, firms effectively curtail bankruptcy risk by executing risk management measures whereas such measures are ineffective when energy uncertainty surpasses a threshold at ∼25th percentile. Our baseline result remains unchanged on employing several robustness checks. Overall, this study yields crucial insights and suggestions for corporate managers, regulators and policymakers to navigate energy shocks and to enhance firm resilience through strategic planning and decision-making.”

From a paper by Oleg Gurshev and Lucas van der Velde

“We examine the contribution of supply and demand shocks to income inequality in a panel setting. Leveraging the newly created Global Repository of Income Dynamics, we study the relationship between unanticipated supply and demand shocks and income inequality, distinguishing between domestic and international (US) shocks. Our results show that shocks originating in the United States, on average, increase income dispersion in other developed countries: demand shocks tend to produce stronger reactions than supply shocks. We explore different transmission channels: trade, financial and expectations. The trade channel appears particularly relevant for supply shocks. Comparing these external shocks with domestic counterparts, we find that domestic demand shocks exhibit similar dynamics, while domestic supply shocks are associated with declines in income inequality.”

From a paper by Jeffrey A. Levy, Gabriel Mathy, and Xuguang Simon Sheng:

“Uncertain times are often bad times, and separating uncertainty shocks from large negative
level shocks is difficult. We use the Base Realignment and Closure (BRAC) process in the
United States in 2005 to investigate this issue, where the level shock may be positive, negative,
or neutral, and is finalized only after a well defined period of significant uncertainty. When
combined with an even greater period of time before the level shock is implemented, we can
clearly separate first-moment from second-moment shocks. When using attention to BRAC
as an instrument, we find that the effect of uncertainty on employment and the labor force is
small but significant, with a 1% decrease in response to a one standard deviation increase in
uncertainty. While similar, the peak effect is smaller and comes after a shorter lag than the
effect found in the existing literature that relies on dynamic models that fall short of making
causal claims.”

From a paper by Jean-Francois Verne:

“This study considers the nonlinear relationship between GDP growth and unemployment in France (1975–2024) using a logistic smooth transition regression (LSTR) model. Findings reveal a threshold unemployment rate of 7.93%, above which the traditional Okun’s law holds (GDP growth reduces unemployment). Below this threshold, an inverted Okun’s law emerges, where economic growth coincides with rising unemployment. This is explained by technological advancements, skill mismatches, and delayed employment adjustments. The results indicate that macroeconomic policies based on linear assumptions are limited in their capacity to address unemployment challenges effectively. Recognizing these nonlinear dynamics is crucial for designing effective labor market policies that account for asymmetries in economic fluctuations.”

From a paper by Ichrak Dridi and Mohamed Malek Belhoula:

“Following the global financial crisis, the interconnection between financial stability and inflation stability has gained increasing recognition, challenging the notion that these objectives are mutually exclusive. This study empirically examines whether central banks, through the adoption of Full-Fledged Inflation Targeting (FFIT), can enhance stock market efficiency in emerging economies. Utilizing data from 36 emerging markets over the period 1995:Q1 to 2024:Q1, we employ Propensity Score Matching to mitigate self-selection and omitted variable biases. Our findings demonstrate that FFIT significantly improves stock market efficiency, with effects emerging after three quarters and persisting for at least two years, as substantiated by Staggered Difference-in-Differences analysis. These results remain robust across multiple sensitivity tests. Mediation analysis confirms that FFIT enhances efficiency primarily through reduced inflation and interest rate volatility and strengthened institutional credibility. Furthermore, results reveal that IT adoption also enhanced efficiency during the Global Financial Crisis and COVID-19, albeit with a lower amplitude compared to the full-sample analysis. By stabilizing inflation expectations and providing transparent policy guidance, FFIT enables investors to incorporate macroeconomic fundamentals into their decision-making, thereby enhancing market transparency and improving stock market efficiency.”