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MIS 4500 (31)

Exogenous Shocks.docx

5 Pages

Management Info. Systems
Course Code
MIS 4500
Pourang Irani

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Exogenous Shocks:  from changes in gov’t policy  unexpected breakup of OPEC  “peace dividend” from fall of Berlin Wall  new products, markets and technologies  Oil shocks: sudden rises affects consumers’ income and reduces spending; inflation rises, maybe offset by contractionary effect of higher oil prices restricting employment and opening up output gap  Financial Crises: bank lending and investor confidence International Interactions:  Macroeconomic linkages: foreign demand for exports; cross-border direct business investment; but not perfectly integrated  Interest Rate / Exchange Rate Linkages: formal or informal exchange rate links; unilateral pegs;  Emerging Markets: o Essential Differences b/w Emerging and Major Economies:  need higher rates of investment than developed countries in physical capital and infrastructure and in human capital  periodic crises from managing foreign debt required for investment  volatile political and social environment  often relatively small and concentrated in areas such as commodities or narrow range of manufactured goods; may rely heavily on oil imports o Country Risk Analysis Techniques:  emerging bonds: risk of country being unable to service debt  stock: growth prospects and vulnerability to surprises  Checklist:  1. How sound is fiscal and monetary policy? ratio of fiscal deficit to GDP: persistently above 4% is concern; ratio of debt to GDP: 70-80% extremely vulnerable  2. What are the economic growth prospects for the economy? if slow growth w/ population growth, likely political stress from falling per capital income o Economic Freedom Index  3. Is the currency competitive, and are the external accounts under control? o current account deficit  4. Is external debt under control? if reluctance to lend new money, may be exodus of capital; ratio of foreign debt to GDP: 50% is dangerous; debt to current account receipts: 200% in danger zone  5. Is liquidity plentiful? foreign exchange reserves in relation to trade flows and short-term debt; ratio of reserves to short-term debt (maturing w/i 12 mos): under 100% is risky  6. Is the political situation supportive of required policies? whether gov’t will implement necessary adjustment policies: cutting budget deficit, privatization, ending monopolies Economic Forecasting:  econometric models: o limitations:  finding adequate measures for real-world activities and relationships to be modeled  measurement error  relationships may change over time from changes of structure of economy o constrains the forecaster to a certain degree of consistency and also challenges the modeler to reassess prior views based on what the model concludes o forecasts upturns much better than recessions  leading indicators: lagging, coincident and leading o diffusion index: how many indicators pointing up and how many down o world:  OECD Composite Leading Indicators o Europe:  Eurozone Harmonized Index of Consumer Prices  German Industrial Production  German IFO Business Survey  French Monthly Business Survey o Asia Pacific:  Tankan Survey  China Industrial Production o South America:  Brazil Industrial Production o North America:  Conference Board’s Index of Leading Economic Indicators:  1. Avg weekly hrs, manufacturing  2. avg weekly initial claims for unemployment insurance  3. manufacturers’ new orders, consumer goods and materials  4. vendor performance, slower deliveries diffusion index  5. manufacturers’ new orders, non-defense capital goods  6. building permits, new private housing units  7. stock price, 500 common stocks  8. money supply, M2  9. interest rate spread, 10-yr Treasury bonds less federal funds  10. index of consumer expectations  three consecutive mos of increases, or 3 consecutive mos of decreases, signaled upturn or downturn in economy w/i 3 to 6 mos Using Economic Info in Forecasting Asset Class Returns:  Cash and Equivalents: reflects markets expectations of rates over maturity period— forecast economy and the central bank’s reaction to the economy  Nominal Default-Free Bonds: components of yield are (i) growth rate of GDP and supply and demand for capital and (ii) forecast inflation over period. o watch business cycle and short-term interest rates  news of stronger economic growth usually makes bond yields rise (prices fall) b/c implied greater demand for capital and possibly higher inflation  rise in short term rates often leads to rise in longer-term bond yields; but may also be expected to slow economy and bond yields could fall  if bond markets expe
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