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on Open MacroEconomics |
| By: | Silvio Contessi; Pierangelo DePace; Johanna Francis |
| Abstract: | We describe the second-moment properties of the components of international capital flows and their relationship (covariance and correlation) to business cycle variables of 22 emerging and OECD countries. Disaggregated flows have different volatility properties, with debt being the most volatile and FDI the least volatile. We show that (a) inward flows are procyclical, outward and net outward flows are countercyclical for most industrial and emerging countries while, for the G-7, both inward and outward flows are procyclical and net outflows are countercyclical; (b) inward FDI flows are procyclical in industrial countries, countercyclical in emerging countries; and (c) there is no clear pattern for other equity flows and debt. Using formal statistical tests, we document changes in variability, covariance, and correlation of capital flows with a set of macroeconomic variables for G-7 countries. We find mixed evidence of changes over capital account liberalization episodes and breaks in international business cycles, and a clear increase in variance for all types and signs of flows. We estimate breaks at unknown dates in the conditional variance of each capital flow to find that they differ considerably from the breaks associated with capital account liberalization and financial globalization. |
| Keywords: | Capital movements ; Business cycles |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-041&r=opm |
| By: | Frantisek Brazdik Author-Name: Juraj Antal |
| Abstract: | The novelty of this work is in the presentation of a theoretical frame work that allows the modeling of an announced switch of the monetary regime. In our experiment, the monetary authority announces stabilization of the nominal exchange rate after the announced number of periods. We analyze the effects of the monetary policy regime for the macroeconomic stability over the transition period. For our analysis, we consider representative forms of standard monetary regimes. Moreover, we rank the examined regimes in terms of loss functions. |
| Keywords: | New Keynesian models, small open economy, monetary regime switch. |
| JEL: | E17 E31 E52 E58 E61 F02 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp368&r=opm |
| By: | Reuven Glick; Michael Hutchison |
| Abstract: | In recent years China has faced an increasing trilemma—how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China’s monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China’s reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth lead to less inflation pressure even with a substantial buildup in international reserves. |
| Keywords: | Monetary policy - China |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-32&r=opm |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper presents statistical analysis supporting stylized facts about sovereign wealth funds (SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel exports and ongoing current account surpluses, and large hoarding of international reserves. It analyzes the degree to which measures of SWF governance and transparency compare with national norms of behavior. We provide evidence that many countries with SWFs are characterized by effective governance but weak democratic institutions, as compared to other nonindustrial countries. We also present a model with which we compare the optimal degree of diversification abroad by a central bank versus that of a sovereign wealth fund. We show that if the central bank manages its foreign assets with the objective of reducing the probability of sudden stops, it will place a high weight on the downside risk of holding risky assets abroad and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the degree of a country's transparency may affect the size of the foreign asset base entrusted to a wealth fund's management, and show that, for relatively low levels of public foreign assets, assigning portfolio management independence to the central bank may be advantageous. However, for a large enough foreign asset base, the opportunity cost associated with the limited portfolio diversification of the central bank induces authorities to establish a wealth fund in pursuit of higher returns. |
| Keywords: | Sovereign wealth fund |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-33&r=opm |
| By: | Rodolphe Blavy; Luciana Juvenal |
| Abstract: | Using a self-exciting threshold autoregressive model, we confirm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods. Measuring transaction costs using the estimated threshold bands, we find evidence that Mexico still faces higher transaction costs than their developed counterparts. Trade liberalization is associated with reduced transaction costs and lower relative price differentials among countries. Other determinants of transaction costs are distance and nominal exchange rate volatility. Our results show that the half-lives of SRERs shocks, calculated by Monte Carlo integration, imply much faster adjustment in the post-NAFTA period. |
| Keywords: | Foreign exchange rates ; North American Free Trade Agreement ; Mexico |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-046&r=opm |
| By: | Mark Weisbrot; Rebecca Ray |
| Abstract: | This paper looks at Venezuela’s export revenue, imports, and trade and current account balances under a range of oil price outcomes for the next two years. It finds that Venezuela would run large current account surpluses for prices between $60-90 per barrel, and would even run a small surplus with prices at $50 per barrel. (Most oil industry estimates for the next two years are in the range of $80-90 per barrel). The authors conclude that Venezuela is unlikely to run into foreign exchange constraints in the foreseeable future, and can pursue expansionary fiscal policies to counter any economic downturn. |
| Keywords: | Venezuela, Venezuelan oil exports, Venezuelan government revenue |
| JEL: | E E6 E62 F F1 F14 O54 Q4 Q43 Q48 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2008-29&r=opm |