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on Open MacroEconomics |
| By: | Kozo Ueda |
| Abstract: | This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking crossborder borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business-cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis. |
| Keywords: | Globalization ; Global financial crisis ; Business cycles ; Financial markets |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:58&r=opm |
| By: | Yu-chin Chen; Kwok Ping Tsang |
| Abstract: | The nominal exchange rate is both a macroeconomic variable equilibrating international markets and a financial asset that embodies expectations and prices risks associated with cross border currency holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we employ a state-space system to model the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and in‡ ation) into a vector autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound rates relative to the dollar. Moreover, by decomposing the yield curves into expected future yields and bond market term premiums, we show that both expectations about future macroeconomic conditions and perceived risks are priced into the currencies. These …ndings provide support for the view that the nominal exchange rate is determined by both macroeconomic as well as financial forces. |
| Keywords: | Exchange Rate, Term Structure, Latent Factors, Term premiums |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:vpi:wpaper:e07-19&r=opm |
| By: | Martin Berka; Mario J. Crucini |
| Abstract: | Movements in a nation's terms of trade are widely viewed as important for the understanding the sources of business cycle °uctuations, the dynamics of the trade balance and economic welfare. Backus, Kehoe and Kydland (1994) emphasize the role of productivity movements in a two-country, two-good setting. In their model an increase in domestic productivity expands out- put at home relative to output abroad and the terms of trade deteriorates. Put di®erently: a large country expanding the supply of the traded good it produces must (in equilibrium) drive down the relative price of its prod- ucts on world markets. The importing country's terms of trade improves, a positive spillover. Backus and Crucini (2000) add a third region to this model; a region that specializes in oil production. When the oil region cuts back production, the relative price of oil rises, a terms of trade improvement for oil producers. Output falls in the oil importing regions because oil is an intermediate input into production of the two manufactured goods produced in those regions. The business cycle implications of this model are consis- tent with empirical work by Hamilton (1983) showing oil price increases in advance of U.S. recessions. Mendoza (1995) studies the terms of trade and business cycles in an extensive cross-country panel using a partial equilibrium business cycle model where terms of trade movements are exogenous. In his theoretical setting, terms of trade shocks are analogous to lotteries with the sign and magnitude of the payout dependent upon a country's pattern of specialization across an array of internationally traded goods. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2010-27&r=opm |
| By: | Robert Kollmann; Zeno Enders; Gernot J. Müller |
| Abstract: | This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007-09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/60880&r=opm |
| By: | Fabio C. Bagliano (Department of Economics and Public Finance "G. Prato", University of Torino); Claudio Morana (Department of Economics and Quantitative Methods, University of Eastern Piedmont) |
| Abstract: | As economic and financial integration between the US and the euro area is strong, assessing whether the recent US crisis may affect the process of real and nominal convergence within the euro area is important. The paper addresses this issue in the framework of a large-scale open economy macroeconometric model, featuring 14 euro area member countries, the USA, and 35 advanced and emerging economies. The results point to a likely contribution of US economic and financial crises to real divergence in the euro area, potentially affecting first, second and third moments of the output growth distribution; on the other hand, implications for nominal convergence are less clearcut. |
| Keywords: | Euro area convergence, Great Recession, financial crisis, economic crisis, factor vector autoregressive models |
| JEL: | C22 E32 F36 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpaper:15&r=opm |
| By: | Hwee Kwan Chow (Asian Development Bank Institute) |
| Abstract: | This paper considers the choices facing the Asian tiger economies regarding growth strategies that foster trans-Pacific rebalancing. A review of historical data spanning 2000 to 2008 reveals only a slight widening of the overall current account surplus but that there is considerable variation across the countries, with Hong Kong, China exhibiting the biggest increase in the saving and investment (S-I) balance. Meanwhile, cross-correlation coefficient estimates tentatively suggest that changes in the real effective exchange rate do not seem to exhibit a consistent negative lead over changes in the S-I gap in the short run over the past decade. High import leakage, particularly for the ultra small, open economies of Hong Kong and Singapore, calls into question the scope for recalibrating growth drivers towards domestic demand. Nonetheless, the implementation of structural policies such as those aimed at raising the productivity and wages of workers in the services industry as well as the introduction of financial products that alleviates the need for precautionary saving can induce domestic consumer demand, especially for the larger economies of Korea and Taipei,China. Moreover, the rising affluence and living standards in fast growing regional economies such as the People’s Republic of China (PRC) offers the Asian tigers the potential of gearing their trade structure in final goods towards markets in the region, thereby aiding the reduction in trans-Pacific imbalances. |
| Keywords: | saving and investment balance, import leakage, People’s Republic of China, trade structure, Asian tigers |
| JEL: | F32 F41 F43 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:2257&r=opm |