Shocks in fluids result from fluid flow that is more rapid than the speed of
a compression wave. Thus there is no means for the flow to adjust gradually.
Pressure, velocity, and temperatures change abruptly, causing severe fatigue
and component destruction in military aircraft and engine turbines. This
problem is not limited to supersonic aircraft; many parts of subsonic craft are
The feedback from oil prices to economic activity is captured by a reduced-form
production function that allows us to separately specify shocks to the output gap
(transitory shocks to output), shocks to potential output (permanent shocks to the level of
output), and shocks to potential output growth (permanent shocks to the growth rate of
output). The richness of this speciﬁcation helps us to model the complicated interactions
of oil price movements and GDP, where both trend and gap decline if oil prices increase.
Levy-Yeyati, Martinez Peria, and Schmukler show that systemic risk exerts a significant impact on the behavior of depositors, sometimes overshadowing their responses to standard bank fundamentals. Systemic risk can affect market discipline both regardless of and through bank fundamentals. First, worsening systemic conditions can directly threaten the value of deposits by way of dual agency problems. Second, to the extent that banks are exposed to systemic risk, systemic shocks lead to a future deterioration of fundamentals not captured by their current values.
However, predictability should not be mistaken for permanence. In the case of policies targeting
investment in physical capital, it is important to „sunset‟ many of the policies. With time the financial
market will price risk efficiently (assuming policy regimes do not generate shocks continuously) and
learning benefits will be exhausted.
An economy’s trade patterns create one channel for the cross-border transmission of shocks.
While the average economy in our data had a current account very close to zero in 2007, the
range is quite large. Trade openness, measured by the ratio of the sum of exports plus
imports to GDP, captures the importance of trade. The average in our data is 98% of GDP,
but the standard deviation of 66 percentage points implies a wide distribution. Finally, a
country’s natural endowment may play a role in its macroeconomic performance.