Working Paper Series

Let the Tree Decide: FABART. A Non-Parametric Factor Model for Nonlinear Oil Shock Transmission

The question of how oil supply news shocks transmit to real activity, financial conditions and regional labor markets is back at the center of the macroeconomic research agenda. To answer this question, we introduce the Factor Bayesian Additive Regression Tree (FABART) model, a nonlinear factor-augmented vector autoregression model, and apply it to a large U.S. macro-financial dataset with externally identified oil supply news shocks. The framework incorporates a flexible nonparametric measurement equation that allows nonlinear transmission to emerge from the data without imposing a specific functional form on the asymmetry. We find that adverse oil supply news shocks generate stronger and more persistent contractions in real activity than the expansions associated with favorable shocks of comparable magnitude, with especially pronounced differences in industrial production, interest rates and equity prices. Employment responses are highly heterogeneous across U.S. states, with substantially stronger contractions in manufacturing-intensive regions than in energy-producing states. Across shock magnitudes, nonlinearities arise mainly between very small and moderate oil-price movements: small shocks generate weak and imprecisely estimated responses, while even moderate shocks produce economically meaningful effects on industrial production and regional employment. Larger shocks, however, do not systematically generate proportionally stronger responses across variables and shock signs.

Working Paper Series The transmission of shocks across sectors and the dynamics of sectoral prices

Monetary Policy Tightening, and Banking Concentration: Structural Evidence from an Emerging Economy

This paper analyses the short-run dynamic relationship between monetary policy and banking market structure in Colombia during a period of post-pandemic inflation and aggressive policy tightening. Using monthly credit portfolio data for 2017–2024, we compute several concentration indicators (the Herfindahl–Hirschman Index (HHI), CRk ratios, and a dominance index) and employ three complementary identification strategies to evaluate the causal effect of monetary policy innovations on banking concentration. First, a structural VAR model identified through sign restrictions finds that contractionary shocks are associated with a short-run increase in banking concentration (median peak response: +0.60 HHI points at h = 3; 90% credible set: [+0.12, +1.16]), contrasting with the negative short-run response obtained under recursive reduced-form identification. Second, an extended VAR including credit portfolio growth as a mechanism variable confirms that contractionary shocks compress aggregate lending but do not generate robust, persistent changes in concentration. Third, local projections with regime-interaction terms formally test the nonlinear mechanisms discussed in the literature and find evidence of state-dependent transmission: the concentration response is larger in the low-inflation regime and attenuates during high-inflation episodes. All estimated effects are transitory and horizon-sensitive, reinforcing a cautious interpretation. The paper contributes new evidence from an emerging economy on the structural consequences of monetary policy and highlights the importance of identification assumptions in determining the direction of this effect.

Untangling the Asymmetric Effects of Oil Price Dynamics and Disaggregated Shocks on Economic Policy Uncertainty: Evidence from India

India’s economic policy uncertainty (EPU) is significantly affected by global commodity market fluctuations, particularly oil prices. Oil-related shocks, such as supply, demand and risk, have been shown to affect domestic, economic and financial conditions in the previous literature, but the effects of these shocks have not been fully explored in India. We set out to decompose the complex dynamics of oil price movements by applying a monthly dataset specifically for India and the high degrees in market tracking via Brent crude prices (from January 2003 to June 2024). We decompose oil price movements into three different types of shocks: supply-driven, demand-driven and risk-driven shocks and examine their effects on EPU by using an MTNARDL model with multiple thresholds. Our study finds that oil price shocks have an asymmetric and threshold-dependent effect on EPU, with long-run effects being more pronounced than short-run effects. In terms of shock components, risk-driven shocks have the strongest impact on the EPU. This research offers two significant conclusions and inferences to the body of current literature. First, the result shows that the effect of oil price shocks on EPU is intrinsically asymmetric and nonlinear, suggesting that different kinds of shocks, such as risk-driven, supply-driven, and demand-driven, transmit through different channels produces diverse policy uncertainty responses. Second, the study provides important insights for practitioners and policymakers by showing that, especially in an emerging economy like India, which is extremely susceptible to external energy shocks, the source and nature of oil price shocks must be carefully identified in order to design effective macroeconomic and stabilization policies.

Analyzing GDP and stock market dynamics

This paper aims to examine whether the forces linking financial markets to real economic activity operate differently across business cycle phases, using quarterly US data from 1990 to 2024, spanning four recession episodes. Specifically, the author asks whether the mechanism that normally keeps equity markets anchored to corporate earnings and real output remains stable between expansions and recessions and what the accumulated output cost is when that mechanism breaks down. The author first estimates a vector error correction model among real gross domestic product (GDP), the S&P 500 Total Return Index and Earnings Per Share, using cointegration tests to identify the long-run equilibrium structure and controlling for monetary policy, consumer confidence, market uncertainty and real GDP expectations. The author then extends this to a Bayesian Markov-Switching vector error correction model that holds the cointegrating vectors constant while allowing adjustment dynamics and shock covariance structures to vary across regimes, with regime identification anchored to NBER recession dates. The author identifies two stable long-run equilibria anchored by earnings per share. This study finds that the stock market index self-corrects toward its earnings equilibrium in normal expansions, while in recessions, the adjustment coefficient linking the stock market index to earnings reverses sign, with the index moving further from earnings fundamentals; as the Granger causality tests detect predictive content from stock returns and earnings growth to GDP growth but not in the reverse direction, no offsetting predictive force is found within the estimated system. The accumulated output cost amounts to 1.78 percentage points of cumulative GDP growth deficit by quarter 20 following a recession onset. The author provides direct evidence that the corrective mechanism linking the stock market index to its long-run earnings equilibrium is regime-dependent, reversing during recessions in a way that has not previously been documented within a regime-switching cointegration framework.

Productivity, Crude Oil Supply Shocks and the Economy of Iran in a Dynamic Stochastic General Equilibrium Framework

This paper investigates the responses of key macroeconomic variables—including output, consumption, investment, capital accumulation, and employment—to productivity and oil market shocks in Iran. Using quarterly data from 1975 to 2024, we estimate an RBC DSGE model and further calibrate a variant incorporating oil supply shocks. The results show that positive productivity and oil shocks generate immediate expansions in output, consumption, investment, labor hours, and wages, reflecting strong short-term multipliers and forward-looking behavior by households and firms. However, these gains are temporary, with impulse responses following a hump-shaped path and gradually declining as shocks dissipate, capital depreciation sets in, and policy or market frictions emerge. This underscores the transient nature of both productivity and oil windfalls and the need for policies that mitigate short-run volatility while fostering structural reforms and diversification. For an oil-dependent economy such as Iran, the findings highlight that while shocks can stimulate activity in the short term, sustainable long-run growth requires institutional mechanisms to channel temporary gains into lasting development.