Pub Date : 2025-09-15DOI: 10.1016/j.jedc.2025.105181
A. Carvajal , H. Zhou
In an economy with uncertainty and asymmetric information, suppose that some agents learn the relation between fundamentals and prices by observing past market outcomes. They refine their understanding as they become more experienced, but their past “errors” contaminate the information they receive. Does this process converge to the “perfect” understanding of the market that underlies rational expectation equilibria? We address this question in a simplified setting that allows for explicit computation of the learning process: a two-state economy with logarithmic utilities and no background risk. Our first result is that as long as the wealth of the uninformed agents is less than half the aggregate wealth of the economy, the learning process indeed converges to rational expectations. This convergence, however, is non-monotonic, and the market oscillates between phases of excess price volatility and phases of excess volume of trade. The learning process, in addition, is costly for the uninformed agents. We interpret our results as underscoring the fragility of ree: markets operate orderly only when speculation is less significant than fundamental trade.
{"title":"Learning to bet (rationally) with logs","authors":"A. Carvajal , H. Zhou","doi":"10.1016/j.jedc.2025.105181","DOIUrl":"10.1016/j.jedc.2025.105181","url":null,"abstract":"<div><div>In an economy with uncertainty and asymmetric information, suppose that some agents learn the relation between fundamentals and prices by observing past market outcomes. They refine their understanding as they become more experienced, but their past “errors” contaminate the information they receive. Does this process converge to the “perfect” understanding of the market that underlies rational expectation equilibria? We address this question in a simplified setting that allows for explicit computation of the learning process: a two-state economy with logarithmic utilities and no background risk. Our first result is that as long as the wealth of the uninformed agents is less than half the aggregate wealth of the economy, the learning process indeed converges to rational expectations. This convergence, however, is non-monotonic, and the market oscillates between phases of excess price volatility and phases of excess volume of trade. The learning process, in addition, is costly for the uninformed agents. We interpret our results as underscoring the fragility of <span>ree</span>: markets operate orderly only when speculation is less significant than fundamental trade.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"180 ","pages":"Article 105181"},"PeriodicalIF":2.3,"publicationDate":"2025-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145099131","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-05DOI: 10.1016/j.jedc.2025.105177
Qiugu He , Xuan Luo , Fan Zheng
We document that a firm's research and development (R&D) expenditure depends on its product diversity. Combining with the fact that Chinese manufacturers often enter new product markets via technology adoption, we develop a quantitative framework of innovation and technology adoption, allowing firms to expand their product scopes. Firms adopt technologies across multiple fields to expand their knowledge base, which in turn serves as an input for subsequent innovation or adoption. Counterfactual analysis from the 2000s reveals that two-thirds of knowledge privately held by all firms is generated through adoption, accounting for one-third of aggregate innovation.
{"title":"Product technology adoption and aggregate innovation","authors":"Qiugu He , Xuan Luo , Fan Zheng","doi":"10.1016/j.jedc.2025.105177","DOIUrl":"10.1016/j.jedc.2025.105177","url":null,"abstract":"<div><div>We document that a firm's research and development (R&D) expenditure depends on its product diversity. Combining with the fact that Chinese manufacturers often enter new product markets via technology adoption, we develop a quantitative framework of innovation and technology adoption, allowing firms to expand their product scopes. Firms adopt technologies across multiple fields to expand their knowledge base, which in turn serves as an input for subsequent innovation or adoption. Counterfactual analysis from the 2000s reveals that two-thirds of knowledge privately held by all firms is generated through adoption, accounting for one-third of aggregate innovation.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105177"},"PeriodicalIF":2.3,"publicationDate":"2025-09-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145019573","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-03DOI: 10.1016/j.jedc.2025.105176
Fulvio Corsi , Luigi Longo , Francesco Cordoni
Starting from the theoretical observation that the identification problem of SVAR models arises from contemporaneous dependence among macroeconomic variables, we show, both theoretically and empirically, that such dependence tends to vanish as the observation frequency increases. By adopting nowcasted high-frequency data, we exploit this feature to identify structural shocks using standard short-run restrictions, thereby reducing or even eliminating the reliance on variable ordering. Our empirical analysis is divided into two parts: an illustrative application comparing identification strategies across different frequencies, and a structural section featuring (i) a Proxy(HF-)SVAR to recover exogenous monetary policy shocks, and (ii) an uncertainty shock analysis using high-frequency data to replicate the well-known dynamics found in the literature. The results align with recent findings and highlight the feasibility and usefulness of preserving high-frequency information in all variables.
{"title":"SVAR identification with nowcasted macroeconomic data","authors":"Fulvio Corsi , Luigi Longo , Francesco Cordoni","doi":"10.1016/j.jedc.2025.105176","DOIUrl":"10.1016/j.jedc.2025.105176","url":null,"abstract":"<div><div>Starting from the theoretical observation that the identification problem of SVAR models arises from contemporaneous dependence among macroeconomic variables, we show, both theoretically and empirically, that such dependence tends to vanish as the observation frequency increases. By adopting nowcasted high-frequency data, we exploit this feature to identify structural shocks using standard short-run restrictions, thereby reducing or even eliminating the reliance on variable ordering. Our empirical analysis is divided into two parts: an illustrative application comparing identification strategies across different frequencies, and a structural section featuring (i) a Proxy(HF-)SVAR to recover exogenous monetary policy shocks, and (ii) an uncertainty shock analysis using high-frequency data to replicate the well-known dynamics found in the literature. The results align with recent findings and highlight the feasibility and usefulness of preserving high-frequency information in all variables.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105176"},"PeriodicalIF":2.3,"publicationDate":"2025-09-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145010248","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-02DOI: 10.1016/j.jedc.2025.105169
Kun Zhang , Nick Feltovich , Yanren Zhang
Work is ordinary and necessary for most people, but some people work excessively (“work persistence”), seemingly driven by internal forces. We theoretically and experimentally investigate the role of relative performance incentives in causing or exacerbating work persistence. In our setting, agents perform a task over two stages. In the first stage, they can earn prizes, which are allocated either randomly or according to relative performance. Afterwards, they have the opportunity to continue working in a second stage, with payment by piece rate and no competition against others. Our theoretical model of motivated belief updating predicts that agents adjust their beliefs asymmetrically: they attribute their relative performance more to their productivity if they win a prize, and more to luck if they lose. This bias leads winners of the first-stage prize to increase their effort in the subsequent piece-rate stage, but with no corresponding decrease in work effort by losers. Results from a real-effort experiment confirm these predictions: winners' effort in the piece-rate stage is roughly 30 percent higher when earlier bonus prizes had been allocated by performance, compared to when those prizes had been allocated randomly. Losers' effort is also higher – not lower – though this difference is not significant.
{"title":"Pride and persistence: Social comparisons in production","authors":"Kun Zhang , Nick Feltovich , Yanren Zhang","doi":"10.1016/j.jedc.2025.105169","DOIUrl":"10.1016/j.jedc.2025.105169","url":null,"abstract":"<div><div>Work is ordinary and necessary for most people, but some people work excessively (“work persistence”), seemingly driven by internal forces. We theoretically and experimentally investigate the role of relative performance incentives in causing or exacerbating work persistence. In our setting, agents perform a task over two stages. In the first stage, they can earn prizes, which are allocated either randomly or according to relative performance. Afterwards, they have the opportunity to continue working in a second stage, with payment by piece rate and no competition against others. Our theoretical model of motivated belief updating predicts that agents adjust their beliefs asymmetrically: they attribute their relative performance more to their productivity if they win a prize, and more to luck if they lose. This bias leads <em>winners</em> of the first-stage prize to increase their effort in the subsequent piece-rate stage, but with no corresponding decrease in work effort by <em>losers</em>. Results from a real-effort experiment confirm these predictions: winners' effort in the piece-rate stage is roughly 30 percent <em>higher</em> when earlier bonus prizes had been allocated by performance, compared to when those prizes had been allocated randomly. Losers' effort is also <em>higher</em> – not lower – though this difference is not significant.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105169"},"PeriodicalIF":2.3,"publicationDate":"2025-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144989204","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.jedc.2025.105167
Yan Wang , Juan Carlos Conesa
Income and wealth inequality has increased substantially in China in the last decades. We propose a multi-sector model with rich heterogeneity to quantify the impact on inequality of key changes that started in the early 1990s. We find that rural-urban migration has alleviated the increase in income inequality by limiting the increase in the rural-urban income gap, and that the emergence and growth of the private sector is the key driving force behind the increase in wealth inequality. Our quantitative exercise suggests that pretax income concentration will continue to increase until the 2050s, while wealth concentration has already peaked.
{"title":"The evolution of income and wealth inequality in China","authors":"Yan Wang , Juan Carlos Conesa","doi":"10.1016/j.jedc.2025.105167","DOIUrl":"10.1016/j.jedc.2025.105167","url":null,"abstract":"<div><div>Income and wealth inequality has increased substantially in China in the last decades. We propose a multi-sector model with rich heterogeneity to quantify the impact on inequality of key changes that started in the early 1990s. We find that rural-urban migration has alleviated the increase in income inequality by limiting the increase in the rural-urban income gap, and that the emergence and growth of the private sector is the key driving force behind the increase in wealth inequality. Our quantitative exercise suggests that pretax income concentration will continue to increase until the 2050s, while wealth concentration has already peaked.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105167"},"PeriodicalIF":2.3,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145010247","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-26DOI: 10.1016/j.jedc.2025.105168
Chamon Wieles , Jan Kwakkel , Willem L. Auping , J.W. van den End
We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty.
{"title":"Scenario discovery to address deep uncertainty in monetary policy","authors":"Chamon Wieles , Jan Kwakkel , Willem L. Auping , J.W. van den End","doi":"10.1016/j.jedc.2025.105168","DOIUrl":"10.1016/j.jedc.2025.105168","url":null,"abstract":"<div><div>We analyse shock and parameter uncertainty in a Dynamic Stochastic General Equilibrium (DSGE) model by exploratory modelling and analysis (EMA). This method evaluates in a novel way the performance of monetary policy under deep uncertainty about the shock and model parameters. Scenarios are designed based on the outcomes of interest for the policymaker. We assess the performance of different policies on their objectives in the scenarios. This maps out the policy trade-offs and supports the central bank in making robust policy decisions. We find that in response to a negative supply shock, policies with low interest rate smoothing and a strong response to inflation most obviously contribute to price stability under deep uncertainty.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105168"},"PeriodicalIF":2.3,"publicationDate":"2025-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145003799","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-22DOI: 10.1016/j.jedc.2025.105166
Thorsten Glück , Zeno Adams
We examine the disruptions to global commodity flows following the default of a commodity trading firm. The physical commodity network is operated by a handful of large traders that are responsible for the timely delivery of raw materials and inputs to industrial production. We propose a model to simulate the resilience and response time of the network following a shock. Our results suggest that a number of commodity traders carry significant systemic risk. The forced removal of a trader from the network has considerable implications for the prices and availability of physical commodities over a period up to 12 months.
{"title":"Systemic risk of commodity traders","authors":"Thorsten Glück , Zeno Adams","doi":"10.1016/j.jedc.2025.105166","DOIUrl":"10.1016/j.jedc.2025.105166","url":null,"abstract":"<div><div>We examine the disruptions to global commodity flows following the default of a commodity trading firm. The physical commodity network is operated by a handful of large traders that are responsible for the timely delivery of raw materials and inputs to industrial production. We propose a model to simulate the resilience and response time of the network following a shock. Our results suggest that a number of commodity traders carry significant systemic risk. The forced removal of a trader from the network has considerable implications for the prices and availability of physical commodities over a period up to 12 months.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105166"},"PeriodicalIF":2.3,"publicationDate":"2025-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144908132","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-14DOI: 10.1016/j.jedc.2025.105165
M'hamed Gaïgi , Vathana Ly Vath , Simone Scotti
The fishery industry is facing increasing challenges in the exploitation of marine resources. Marine resources are classic examples of common-property resources subject to fundamental problems of economic waste and over-exploitation, which may lead to resource destruction, including extinction. The past decades have highlighted the relevance of ecological catastrophes, such as the fate of the cod population in the Northwest Atlantic. These events do not occur with a constant frequency, but are clustered over time. Our objective is to study a harvesting management problem under the assumption that unexpected ecological disasters may occur in clusters. We model this clustering phenomenon using marked Hawkes processes. We characterize our value function as the unique solution to a Hamilton-Jacobi-Bellman inequality. We describe the optimal harvesting strategy by identifying the harvesting and non-harvesting regions. Our results are counterintuitive, challenging the generally accepted belief that, when facing an increasing risk of decimation due to disasters, the optimal harvesting policy should lead to a reduction in harvesting activity. These findings offer valuable insights into the fragile nature of fish resources, potentially explaining the collapse of fisheries in the Northwest Atlantic. Governments and international authorities must take action against the causes of such disasters, such as pollution and the overexploitation of marine resources, in order to reduce the risk of further decimation and to better assess and address the true cost of marine resource extinction. We further enrich our study with numerical analysis, providing additional insights into the optimal harvesting policy.
{"title":"Optimal harvesting under uncertain environment with clusters of catastrophes","authors":"M'hamed Gaïgi , Vathana Ly Vath , Simone Scotti","doi":"10.1016/j.jedc.2025.105165","DOIUrl":"10.1016/j.jedc.2025.105165","url":null,"abstract":"<div><div>The fishery industry is facing increasing challenges in the exploitation of marine resources. Marine resources are classic examples of common-property resources subject to fundamental problems of economic waste and over-exploitation, which may lead to resource destruction, including extinction. The past decades have highlighted the relevance of ecological catastrophes, such as the fate of the cod population in the Northwest Atlantic. These events do not occur with a constant frequency, but are clustered over time. Our objective is to study a harvesting management problem under the assumption that unexpected ecological disasters may occur in clusters. We model this clustering phenomenon using marked Hawkes processes. We characterize our value function as the unique solution to a Hamilton-Jacobi-Bellman inequality. We describe the optimal harvesting strategy by identifying the harvesting and non-harvesting regions. Our results are counterintuitive, challenging the generally accepted belief that, when facing an increasing risk of decimation due to disasters, the optimal harvesting policy should lead to a reduction in harvesting activity. These findings offer valuable insights into the fragile nature of fish resources, potentially explaining the collapse of fisheries in the Northwest Atlantic. Governments and international authorities must take action against the causes of such disasters, such as pollution and the overexploitation of marine resources, in order to reduce the risk of further decimation and to better assess and address the true cost of marine resource extinction. We further enrich our study with numerical analysis, providing additional insights into the optimal harvesting policy.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105165"},"PeriodicalIF":2.3,"publicationDate":"2025-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144864595","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a theoretical dynamic trading model with heterogeneous agents to examine how introducing a dark pool—running in parallel to a traditional lit exchange organized as a limit order market—primarily affects execution risk and price settings, and how these changes, in turn, influence the welfare of different trader types. Our model’s computational simulations show that the addition of a dark pool reduces liquidity on the traditional lit exchange. This liquidity reduction is evidenced by longer order execution times and a wider effective spread in the traditional lit exchange, driven by the migration of trading activity to the dark pool. We also identify two opposing channels that influence traders’ performance: the execution delay channel and the price improvement channel. Regarding the execution delay channel, dark orders lead to longer execution times for impatient traders (who seek to trade quickly) and shorter execution times for speculators (who wait for favorable execution prices relative to the asset’s fundamental value). This is because dark orders generally have longer (shorter) execution times than market (limit) orders. Regarding the price improvement channel, dark orders offer more favorable prices for impatient traders than market orders, while dark orders can result in less advantageous pricing for speculators. This is because dark orders are typically executed at the midquote of the bid and ask prices from the limit order market. Ultimately, the effect on execution risk, price improvement, and welfare for both impatient traders and speculators depends on which of these two opposing channels prevails.
{"title":"Execution risk and price improvement under dark pools","authors":"Alejandro Bernales , Daniel Ladley , Evangelos Litos , Marcela Valenzuela","doi":"10.1016/j.jedc.2025.105163","DOIUrl":"10.1016/j.jedc.2025.105163","url":null,"abstract":"<div><div>We develop a theoretical dynamic trading model with heterogeneous agents to examine how introducing a dark pool—running in parallel to a traditional lit exchange organized as a limit order market—primarily affects execution risk and price settings, and how these changes, in turn, influence the welfare of different trader types. Our model’s computational simulations show that the addition of a dark pool reduces liquidity on the traditional lit exchange. This liquidity reduction is evidenced by longer order execution times and a wider effective spread in the traditional lit exchange, driven by the migration of trading activity to the dark pool. We also identify two opposing channels that influence traders’ performance: the execution delay channel and the price improvement channel. Regarding the execution delay channel, dark orders lead to longer execution times for impatient traders (who seek to trade quickly) and shorter execution times for speculators (who wait for favorable execution prices relative to the asset’s fundamental value). This is because dark orders generally have longer (shorter) execution times than market (limit) orders. Regarding the price improvement channel, dark orders offer more favorable prices for impatient traders than market orders, while dark orders can result in less advantageous pricing for speculators. This is because dark orders are typically executed at the midquote of the bid and ask prices from the limit order market. Ultimately, the effect on execution risk, price improvement, and welfare for both impatient traders and speculators depends on which of these two opposing channels prevails.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"179 ","pages":"Article 105163"},"PeriodicalIF":2.3,"publicationDate":"2025-08-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144886056","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-08-06DOI: 10.1016/j.jedc.2025.105162
Markku Lanne, Savi Virolainen
We introduce a new smooth transition vector autoregressive model with a Gaussian conditional distribution and transition weights that, for a pth order model, depend on the full distribution of the preceding p observations. Specifically, the transition weight of each regime increases in its relative weighted likelihood. This data-driven approach facilitates capturing complex switching dynamics, enhancing the identification of gradual regime shifts. In an empirical application to the macroeconomic effects of a severe weather shock, we find that in monthly U.S. data from 1961:1 to 2022:3, the shock has stronger impact in the regime prevailing in the early part of the sample and in certain crisis periods than in the regime dominating the latter part of the sample. While the overall evidence is somewhat mixed, this may lend some support to overall adaptation of the U.S. economy to severe weather over time.
{"title":"A Gaussian smooth transition vector autoregressive model: An application to the macroeconomic effects of severe weather shocks","authors":"Markku Lanne, Savi Virolainen","doi":"10.1016/j.jedc.2025.105162","DOIUrl":"10.1016/j.jedc.2025.105162","url":null,"abstract":"<div><div>We introduce a new smooth transition vector autoregressive model with a Gaussian conditional distribution and transition weights that, for a <em>p</em>th order model, depend on the full distribution of the preceding <em>p</em> observations. Specifically, the transition weight of each regime increases in its relative weighted likelihood. This data-driven approach facilitates capturing complex switching dynamics, enhancing the identification of gradual regime shifts. In an empirical application to the macroeconomic effects of a severe weather shock, we find that in monthly U.S. data from 1961:1 to 2022:3, the shock has stronger impact in the regime prevailing in the early part of the sample and in certain crisis periods than in the regime dominating the latter part of the sample. While the overall evidence is somewhat mixed, this may lend some support to overall adaptation of the U.S. economy to severe weather over time.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"178 ","pages":"Article 105162"},"PeriodicalIF":2.3,"publicationDate":"2025-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144810461","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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