Shock (economics)

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In the economy, a macroeconomic shock is usually understood to mean exogenous events that have a significant impact on an economy .

General

The term originally came from medicine , where it is considered a life-threatening condition for humans. Medicine took it over as Anglicism ( English shock , shock, vibration ' ). In macroeconomics , he describes a sudden, unplanned and unexpected massive event that surprises (“shocked”) market participants and to which they cannot react immediately and appropriately. Shocks are the exogenous changes in total demand or total supply . Shocks are the changes in exogenous quantities that affect endogenous quantities. An adjustment in the short term ( english short run ) for market participants not possible because of different delay effects (perception of shock, decisions and their implementation), so that only a medium or long-term reaction ( english long run is) possible.

causes

Any trigger ( English trigger ), of the uncertainty on the exchanges or other markets leads caused worldwide in industries , the requirements for a trend break comprise a shock. Causes can be of a political, psychological, economic or other nature. The political causes include, for example, wars ( civil wars , trade wars ) or state crises ( revolution , debt crisis ), psychological ones show themselves through great uncertainties or insecurities , economic causes ( financial crises , market developments , market disruptions , speculative bubbles , structural change , corporate crises , supply crises ), others are for example Natural disasters , pandemics , technology or terrorism .

The causes can also be systematized according to their triggering economic size in economic shocks , credit shocks , liquidity shocks and price change shocks . Economic shocks can be triggered by an industry crisis, which in turn can lead to credit shocks. They occur when the debt service coverage of major debtors or entire industries is no longer given and their lenders also get into a corporate crisis or a credit crunch . This in turn can result in liquidity and price change shocks, which can lead to corporate crises and, as a contagion effect, can have domino effects on the economy or the world economy . The biggest bank failure of Lehman Brothers in September 2008 triggered a shock in the financial markets around the world , especially as market participants assumed a rescue , so that interbank trading and the derivatives market collapsed completely.

species

Shocks are to be systematized as follows:

  • Positive or negative shocks : depending on whether shocks are beneficial or disadvantageous for the economy as a whole , one generally speaks of positive or negative shocks. In the following, only the negative shocks are assumed.
  • Monetary or real shocks : The monetary shocks affect the financial economy , real ones affect the real economy . Monetary shocks trigger relatively strong short-term exchange rate effects because, due to the system of more rapidly reacting financial markets, they only have a delayed effect on the goods markets . Real economic shocks (such as autonomous supply or demand shifts ) arise in the goods sector and only trigger adjustment processes in the financial markets after the goods market has responded.
  • Supply or demand shocks : According to Rudiger Dornbusch , a supply shock represents an economic disruption, the first impact of which is a shift in the aggregated supply curve to the right. They cause the price level to rise and the market volume to fall. If market prices and market volume are negatively correlated, this is a real supply shock; if they are positively correlated, there is a real demand shock. Demand shocks shift the demand curve to the right and lead to the fact that the previous production volume can no longer be maintained, so that at the prevailing factor prices it is not profitable to maintain employment ; unemployment arises . Governments often respond with stabilizing support programs, so that government spending and public debt rise .
  • Symmetrical or asymmetrical shocks : All states are hit equally and in the same direction by symmetrical shocks . On the other hand, if states react differently to the same shocks and / or if the shocks only affect certain countries or economic sectors or if the direction differs, these are asymmetrical shocks. The latter are rather unproblematic in EMU , they lead to nationally different current account imbalances . In this context, symmetrical shocks are all real or monetary supply and demand disruptions that require a relative volume or price adjustment between domestic and foreign countries.
  • Temporary or permanent shocks : Temporary shocks are caused by merely temporary fluctuations, for example in raw material prices (symmetrical) or employment in an economy (asymmetrical). Permanent shocks are often the result of medium or long-term imbalances in the economy as a whole ( consumption , government consumption , investments or external contributions ).
  • Exogenous and endogenous shocks : Exogenous shocks hit a state or market from the outside and act on it. Also endogenous shocks are possible and have their origin in the market mechanism . For example, companies in the process of expansion can tend to overestimate demand and make expansion investments that cannot be fully utilized and lead to empty or overcapacities with a subsequent recession .

The Nixon Shock of March 1973, for example, a balanced, permanent, negative supply and demand shock by the Bretton Woods system . The 1973/74 oil price shock was a symmetrical, permanent, negative supply shock . The global financial crisis from 2007 onwards is to be classified as a symmetrical, permanent, negative supply and demand shock with the consequence of larger supply or demand shifts .

economic aspects

Macroeconomic shocks disrupt the macroeconomic market equilibrium , so that dynamic spill-over effects are triggered. The resulting adjustment processes will restore a new macroeconomic market equilibrium . An exogenous shock is defined as a surprising change in exogenous variables . It is a one-off event, the extent and timing of which cannot be foreseen by economic agents. It usually entails changes in the economic structure and other subsequent adjustment processes.

The theoretical basis of the shocks is the IS-LM model developed by John Maynard Keynes in 1936 , which provides for a shift in the IS curve for the demand for goods and a shift in the LM curve for the demand for money . From Keynes' point of view, recessions are not triggered by negative supply shocks, but by insufficient demand . The multiplier-accelerator model by Paul A. Samuelson and John R. Hicks (1939/1950) assumes that an exogenous shock leads to larger oscillations. The older theory of optimal currency areas by Robert Mundell (1961) saw the exchange rate as a means of overcoming asymmetrical shocks that would affect the countries of a monetary union to varying degrees, with a focus on demand shocks . The model developed by Rudiger Dornbusch in 1976 tries to explain the phenomenon of "overshooting", ie the overshooting of the nominal exchange rate following a monetary shock. According to this, the exchange rate reacts more violently to an exogenous shock in the short term than in the long term. The overshoot can lead to the formation of speculative bubbles, which are an independent cause of shock.

According to Dornbusch, a supply shock is an economic disruption, the first impact of which is a shift in the aggregated supply curve. The oil price shock between 1971 and 1974 caused the oil price to quadruple and led to a recession between 1973 and 1975. Accordingly, aggregated demand shocks in the event of changes in government spending, government debt and the key interest rate are examined. A saturation shock occurs when market growth has peaked and at the same time expansion investments reach their maximum.

The financial and economic policy must align their instruments on all types of shocks, and for control of the government revenues are and state expenditure. Tax policy can also be used to respond to shocks, while spending policy can generate targeted economic stimulus programs with an anti-cyclical effect .

meaning

Economies are subject to macroeconomic shocks and their dynamic effects on production throughout the period. These dynamic effects are known as transmission mechanisms. Constantly occurring macroeconomic shocks and their dynamic effects are therefore considered to be the cause of production fluctuations, which are often referred to as business cycles, i.e. fluctuations in production growth around trend growth. The transmission mechanisms of macroeconomic shocks can have very different effects, but mostly within a short period of time . For example, the effects on production are initially very strong and gradually diminish again, or they are initially weak, become stronger over time and then weaken again. However, some shocks also affect production in the medium term , for example a permanent increase in the price of raw materials as an effect on the aggregate supply. Over time, the market system processes these shocks through adjustment processes in such a way that a new macroeconomic equilibrium is established under the new conditions. New shocks then start this adjustment process all over again and business cycles emerge. One shock or an unfavorable combination of several shocks can have such unfavorable effects on the economy that it leads to an economic recession like the oil price shock of the 1970s.

Individual evidence

  1. ↑ Axel Börsch-Supan / Reinhold Schnabel, Volkswirtschaft in fifteen cases , 1998, p. 294
  2. ↑ Frank C. Englmann, Macroeconomics , 2007, p. 64
  3. ↑ Peter Meier, Die Wirtschaft als Schwingendes System , 2019, p. 132
  4. ↑ Joachim Bonn, Bankenkrisen und Bankenregulierung , 1998, p. 321 ff.
  5. ↑ Thomas Hartmann-Wendels , Low equity cover, insufficient transparency and false incentives , in: Wirtschaftsdienst 88 (11), 2008, p. 708
  6. ↑ Axel Börsch-Supan / Reinhold Schnabel, Volkswirtschaft in fifteen cases , 1998, p. 294
  7. ↑ Willi Albers (Ed.), Handwörterbuch der Wirtschaftswwissenschaft , Volume 9, 1982, p. 757
  8. ↑ Rudiger Dornbusch / Stanley Fischer / Richard Startz, Makroökonomik , 2003, p. 157 f.
  9. ^ Rüdiger Dornbusch / Stanley Fischer / Richard Startz, Macroeconomics , 2003, p. 158
  10. ↑ Michael Bruno / Jefrrey D Sachs, Economics of Worldwide Stagflation , 1985, p. 112 ff.
  11. ↑ Rudolf Henn (Ed.), Technologie, Growth and Employment , 1987, p. 740
  12. ↑ Norbert Schuppan, The Euro Crisis , 2014, p. 6
  13. ↑ Springer Fachmedien Wiesbaden (ed.), Compact Lexicon Internationale Wirtschaft , 2013, p. 414
  14. ↑ Norbert Schuppan, The Euro Crisis , 2014, p. 6
  15. ↑ Dieter Duwendag, Monetary and Currency Policy in Small, Open Economies , 1994, p. 20 FN 6
  16. ↑ David Miles / Andrew Scott / Francis Breedon, Makroökonomie , 2014, p. 321
  17. ↑ Peter Meier, Die Wirtschaft als Schwingendes System , 2019, p. 111
  18. ↑ Michael Artis, Should the UK join EMU? , 2000, p. 72
  19. ↑ Rudiger Dornbusch / Stanley Fischer / Richard Startz, Makroökonomik , 2003, p. 157 f.
  20. ↑ Andreas Bley, Determinants of Work Fluctuation and Unemployment , 1999, p. 208
  21. ↑ Peter Meier, Die Wirtschaft als Schwingendes System , 2019, p. 118
  22. ↑ Norbert Schuppan, The Euro Crisis , 2014, p. 12
  23. ↑ a b Olivier Blanchard / Gerhard Illing, Macroeconomics. 4th updated edition. Pearson Studium, Munich 2006, ISBN 3-8273-7051-5 , p. 232.