|
on Open MacroEconomics |
| By: | Andrew K. Rose; Mark M. Spiegel |
| Abstract: | This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for political institutions, trade, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature. |
| JEL: | E32 F32 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14336&r=opm |
| By: | Carmen M. Reinhart; Vincent R. Reinhart |
| Abstract: | A considerable literature has examined the causes, consequences, and policy responses to surges in international capital flows. A related strand of papers has attempted to catalog current account reversals and capital account "sudden stops." This paper offers an encompassing approach with an algorithm cataloging capital inflow bonanzas in both advanced and emerging economies during 1980-2007 for 181 countries and 1960-2007 for a subset of 66 economies from all regions. In line with earlier studies, global factors, such as commodity prices, international interest rates, and growth in the world's largest economies, have a systematic effect on the global capital flow cycle. Bonanzas are no blessing for advanced or emerging market economies. In the case of the latter, capital inflow bonanzas are associated with a higher likelihood of economic crises (debt defaults, banking, inflation and currency crashes). Bonanzas in developing countries are associated with procyclical fiscal policies and attempts to curb or avoid an exchange rate appreciation -- very likely contributing to economic vulnerability. For the advanced economies, the results are not as stark, but bonanzas are associated with more volatile macroeconomic outcomes for GDP growth, inflation, and the external accounts. Slower economic growth and sustained declines in equity and housing prices follow at the end of the inflow episode. |
| JEL: | F30 F32 F34 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14321&r=opm |
| By: | Tan, Kang Yong (University of Oxford); Tanaka, Misa (Bank of England) |
| Abstract: | This paper examines the welfare implications of international monetary co-operation using a stylised two-country New Keynesian general equilibrium model of imperfect information. We show that setting a self-oriented monetary policy rule generally leads to welfare gains relative to passive monetary policy even when central banks do not have perfect information about the foreign economy. However, information sharing between central banks in this set-up, by itself, has ambiguous welfare implications. Gains from monetary co-ordination are largest when productivity shocks are negatively correlated across countries. |
| Keywords: | Policy co-ordination; imperfect information; monetary policy; new open economy macroeconomics. |
| JEL: | F41 F42 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0344&r=opm |
| By: | Kim, Soyoung (Korea University); Lee, Jong-Wha (Asian Development Bank) |
| Abstract: | We examine the real and financial integration of East Asian economies, comparing the degree of real versus financial integration, the degree of global versus regional integration, and the extent of integration before versus after the 1997/98 financial crisis in East Asian economies. We analyze price and quantity measures of integration such as the size of intra- and inter-regional trade, cross-border financial assets, correlation of stock returns, and interest rate differentials. In addition, we adopt a panel VAR approach of investigating cross-country output inter-dependence and consumption relation in order to infer the macroeconomic consequences of real and financial integration on East Asian economies. The empirical investigations suggest that (i) using the quantity measure there is a significant increase in real integration within East Asia; (ii) real-side integration based on output linkage increased substantially after the Asian crisis, both regionally and globally; (iii) although quantity and price measures showed some degree of increased financial integration after the crisis, the cross-country consumption relation did not change much; (iv) the degree of regional financial integration within Asia is far smaller than the degree of global financial integration, based on the consumption-based measure; and (v) financial integration lags real integration, especially for regional integration within Asia. |
| Keywords: | Trade and financial integration; global and regional integration; risk sharing; East Asia |
| JEL: | F15 F36 F41 |
| Date: | 2008–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0017&r=opm |
| By: | Lee, Jong-Wha (Asian Development Bank) |
| Abstract: | This paper analyzes the patterns and determinants of financial integration in East Asia by using the data set of cross-border holdings of financial assets such as equity portfolio, long-term and short-term debt securities, and bank claims. Empirical analysis based on the gravity model of bilateral international asset holdings shows that financial integration among East Asian economies, particularly in equity and debt securities, is relatively lower than in Europe. A large part of regional financial integration in East Asia is due to heavy intra-regional trade in goods-after controlling for bilateral trade volume, East Asia's relatively lower regional integration becomes apparent. The relative lack of financial integration is due largely to underdeveloped financial infrastructure, a low level of capital account liberalization, and higher exchange volatility. |
| Keywords: | Cross-border portfolio investment; financial integration; East Asia; gravity model |
| JEL: | F21 F36 F41 G15 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0013&r=opm |
| By: | Campa, Jose Manuel (IESE Business School); Gonzalez Minguez, Jose M (Banco de Espana); Sebastia Barriel, Maria (Bank of England) |
| Abstract: | This paper focuses on the non-linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU-15). The paper looks at three different types of non-linearities: (a) non-proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments), (b) asymmetric adjustment to cost-increasing and cost-decreasing shocks, and (c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long-run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long-run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long-run equilibrium. Deviations from long-run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds, and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities. |
| Keywords: | Exchange rate adjustment; European Union; monetary union. |
| JEL: | F31 F36 F42 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0347&r=opm |
| By: | Blake, Andrew P (Bank of England); Markovic, Bojan (Bank of England) |
| Abstract: | The purpose of this paper is to examine how important an improvement in global monetary policy might be for the macroeconomic performance of a small open economy such as the United Kingdom. Our paper contributes to the literature by proposing a new methodology to treat indeterminate solutions (the most-robust solution), and by analysing a policy improvement within a three-country framework. Both contributions yield a rich set of theoretical and policy implications. We find that the performance of the domestic macroeconomy depends crucially on domestic monetary policy, but there remains significant potential for monetary policy abroad to improve the stability of inflation and output in a small open economy. Importantly, how much of this potential spillover from policy abroad crystallises is still endogenous to the conduct of domestic policy. We also show that an improvement in policy abroad may not reduce domestic volatility when domestic policy is the only poor policy globally. In such a case domestic volatility can even become worse. Our paper also yields interesting results related to the impact of a policy improvement abroad on inflation persistence in the domestic economy and her exposure to foreign shocks. |
| Keywords: | Indeterminacy; stochastic volatility; Taylor rule; international spillovers; Great Inflation. |
| JEL: | C62 D84 E30 E58 E61 F41 F42 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0353&r=opm |
| By: | G. C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Paul D. McNelis (Department of Finance, Graduate School of Business Administration, Fordham University) |
| Abstract: | This paper compares the effects of pro and counter-cyclical government spending on income inequality and welfare in a small open economy. We examine the consequences of alternative government spending rules following shocks to productivity, domestic interest rates, terms of trade and export demand. The simulated results show that the type of spending rule makes negligible difference to welfare, in the face of domestic or external shocks. However, pro-cyclical government spending reduces income inequality by more than counter-cyclical spending behavior across different shocks and alternative relative labour intensities.Length: 35 pages |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2008n18&r=opm |
| By: | Irwin, Gregor (Bank of England); Penalver, Adrian (Bank of England); Salmon, Chris (Bank of England); Taylor, Ashley (London School of Economics) |
| Abstract: | We develop a model in which countries can protect themselves against shocks by subscribing to a credit union that shares the key features of the International Monetary Fund, or by self-insuring through accumulating reserves. We assess the impact of the increasing heterogeneity of the Fund's membership on the political equilibrium Fund size and hence its effectiveness as a credit union. We find the Fund's existing lending framework is well suited to a world in which its members have homogeneous interests, but as the membership has become more heterogeneous the Fund is increasingly unlikely to provide financing on a sufficient scale to meet the demands of higher-risk members, leading them to rely more heavily on self-insurance. We conclude that the framework governing the Fund's lending operations may no longer be appropriate. |
| JEL: | F33 F34 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0349&r=opm |