Shock (economics)

Under a macroeconomic shock is defined as a sudden onset event that leads to a change of the aggregate offer or aggregate demand.

General

Macroeconomic shocks disturb the overall economic market equilibrium, so that dynamic transmission mechanisms are triggered. Through resulting adaptation processes, a new macro-economic market equilibrium is restored.

A macroeconomic shock, which leads to a shift of the aggregate offer is called a supply shock. In the case of a demand shock, the aggregate demand shifts.

An exogenous shock is defined as a surprising change of exogenous variables. It is a unique event, the extent and timing of economic agents can not be anticipated. He usually leading to changes in the economic structure and further, trailing adjustment processes by itself.

Exogenous factors, whose abrupt change trigger a supply shock:

  • Commodity prices
  • Wage and salary costs
  • Labor productivity
  • Technological innovations
  • Taxes and laws
  • Natural disasters

Exogenous factors, whose abrupt change trigger a demand shock:

  • Price level
  • Income
  • Taxation
  • Government debt
  • Exchange rates
  • Consumer confidence

Types of shocks

Temporary and permanent shocks

  • Temporary shocks have an impact over the medium term and may be cushioned by fiscal and monetary policy measures.
  • Permanent shock effect over the medium term, they can be addressed only by means of comprehensive structural reforms.

Financial and real shocks

  • Financial shocks are triggered by a sudden change in prices, the money supply or the exchange rate, for example.
  • Real shocks occur, for example, by a change in the overall propensity to invest.

Policy -related and exogenous shocks

  • Policy -induced shocks are caused by domestic economic policy, eg artificial stimulation of an economy.
  • Exogenous shocks are not subject to the direct influence economic policy decisions.

Positive and negative shocks

  • Positive shocks to improve the supply and / or demand conditions and lead to an increase in production / economic recovery.
  • Negative shocks worsen the supply and / or demand conditions and cause a decrease in production / economic downturn.

A macroeconomic shock usually combined several of the above types. Depending on the type or combination of types of shocks have very different effects on the market.

Importance

National economies are quite time macroeconomic shocks and their dynamic effects on production. These dynamic effects are referred to as transmission mechanisms. Thus constantly occurring macroeconomic shocks and their dynamic effects are considered to be the cause of fluctuations in production, which are often referred to as business cycles, ie fluctuations of output growth to a trend growth. However, the transmission mechanisms of macroeconomic shocks can affect all different, usually in a short period of time. For example, the effects on production are initially very strong and build up gradually again or they are weak at first, become stronger over time, and then weaken again. However, some shocks also act over the medium term on the production, for example, a permanent increase of raw material price as impact on aggregate supply. Over time, the market system is processed by adaptive processes this shocks so that sets a new macroeconomic equilibrium under the new conditions. With new shocks this adjustment process then begins anew, and economic cycles arise. A shock or a combination of several adverse shocks can have such adverse effects on the economy, that there is a recession in the economy, such as the oil price shock in the 70s.

Theoretical background

It is based on the macro-economic theory of Keynes, the IS- LM model (total model).

  • Shock on the side of demand for goods: shift of the IS curve
  • Shock on the side of money demand: shift of the LM curve
  • Supply shock: Change in the production function

In the model, as long as adjustments are made, until a new market equilibrium under the changed conditions.

Example

Increase the money supply by the central bank

  • In a short time:
  • Over the medium term:

Economists explain this state of affairs with the neutrality of money over the medium term.

  • However, this expansionary monetary policy leads to the rise in inflation, which in turn can have a negative impact on the economy.
Exogeny Anticipation (disambiguation)
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