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on Open MacroEconomics |
| By: | Giancarlo Corsetti; Luca Dedola; Francesca Viani |
| Abstract: | Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand. |
| JEL: | F41 F42 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17501&r=opm |
| By: | Georg H. Strasser (Department of Economics, Boston College) |
| Abstract: | The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firm export and price setting decisions in response to exchange rate fluctuations and changing credit conditions. A unique German firm survey dataset allows me to study the impact of the EUR/USD exchange rate during the years 2003-2010. Its information on pricing and export expectations at the firm-level enables me to measure the instantaneous response of a firm to changing financial constraints and exchange rates, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate "puzzles" in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to the prices is more than twice the rate of unconstrained firms. Similarly, their exports are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis. |
| Keywords: | exchange rate pass-through, exchange rate disconnect, financing constraints, pricing to market, exports, credit crunch, trade collapse, law of one price, trade finance |
| JEL: | F31 E44 F40 E32 G21 |
| Date: | 2010–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:788&r=opm |
| By: | Fratzscher, Marcel; Mehl, Arnaud; Vansteenkiste, Isabel |
| Abstract: | This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new dataset of real effective exchange rates and fiscal balances for 21 countries since 1880. We find evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (i.e. rollover/sudden stop risk) than on its level per se. We also uncover significant nonlinear effects at high levels of public debt as well as significantly negative risk premia for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, our estimates indicate that such premia remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high. This suggests that a currency’s international status is not necessarily sufficient to shelter it from collapse. |
| Keywords: | advanced economies; banking crises; currency crashes; exchange rates; fiscal vulnerability; foreign debt; reserve currencies; total debt level |
| JEL: | F30 F31 N20 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8612&r=opm |
| By: | Menzie D. Chinn; Barry Eichengreen; Hiro Ito |
| Abstract: | We examine whether the behavior of current account balances changed in the years preceding the global crisis of 2008-09, and assess the prospects for global imbalances in the post-crisis period. Changes in the budget balance are an important factor affecting current account balances for deficit countries such as the U.S. and the U.K. The effect of the “saving glut variables” on current account balances has been relatively stable for emerging market countries, suggesting that those factors cannot explain the bulk of their recent current account movements. We also find the 2006-08 period to constitute a structural break for emerging market countries, and to a lesser extent, for industrialized countries. We attribute the anomalous behavior of pre-crisis current account balances to stock market performance and real housing appreciation; fiscal procyclicality and the stance of monetary policy do not matter as much. Household leverage also appears to explain some of the standard model’s prediction errors. Looking forward, U.S., fiscal consolidation alone cannot induce significant deficit reduction. For China, financial development might help shrink its current account surplus, but only when it is coupled with financial liberalization. These findings suggest that unless countries implement substantially more policy change, global imbalances are unlikely to disappear. |
| JEL: | F32 F41 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17513&r=opm |
| By: | Joshua Aizenman; Brian Pinto; Vladyslav Sushko |
| Abstract: | We examine how financial expansion and contraction cycles affect the broader economy through their impact on 8 real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others such as government, public utilities, and transportation also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have asymmetric effects, with the majority of real sectors adversely affected by contractions but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms 2 to 3 times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness, relative predominance of construction, manufacturing, and wholesale and retail sectors, and low international reserves. Finally, we find that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of “up by the stairs, down by the elevator dynamics.” |
| JEL: | F15 F31 F36 F4 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17530&r=opm |
| By: | Eswar S. Prasad |
| Abstract: | I document that emerging markets have cast off their “original sin”--their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets’ external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I discuss a possible mechanism for global liquidity insurance that would meet emerging markets’ demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions. |
| JEL: | F3 F4 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17497&r=opm |
| By: | Joshua Aizenman; Yothin Jinjarak; Donghyun Park |
| Abstract: | We investigate the relationship between economic growth and lagged international capital flows, disaggregated into FDI, portfolio investment, equity investment, and short-term debt. We follow about 100 countries during 1990-2010 when emerging markets became more integrated into the international financial system. We look at the relationship both before and after the global crisis. Our study reveals a complex and mixed picture. The relationship between growth and lagged capital flows depends on the type of flows, economic structure, and global growth patterns. We find a large and robust relationship between FDI – both inflows and outflows – and growth. The relationship between growth and equity flows is smaller and less stable. Finally, the relationship between growth and short-term debt is nil before the crisis, and negative during the crisis. |
| JEL: | F21 F32 F43 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17502&r=opm |
| By: | Svetlana Demidova; Andres Rodriguez-Clare |
| Abstract: | In this paper we present a version of the Melitz (2003) model for the case of a small economy and summarize its key relationships with the aid of a simple figure. We then use this figure to provide an intuitive analysis of the implications of asymmetric changes in trade barriers and show that a decline in import costs always benefits the liberalizing country. This stands in contrast to variants of the Melitz model with a freely traded (outside) sector, such as Demidova (2008) and Melitz and Ottaviano (2008), where the country that reduces importing trade costs experiences a decline in welfare. |
| JEL: | F1 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17521&r=opm |
| By: | Martin Berka; Mario J Crucini; Chih-Wei Wang |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2011-34&r=opm |
| By: | Robert Anderton (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Aidan Meyler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Luca Gattini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Mario Izquierdo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Valerie Jarvis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ri Kaarup (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Magdalena Komzakova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Bettina Landau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Matthias Mohr (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Adrian Page (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); David Sondermann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); David Cornille (National Bank of Belgium, boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Tsvetan Tsalinski (Bulgarian National Bank, 1, Knyaz Alexander ? Sq., 1000 Sofia, Bulgaria.); Zornitsa Vladova (Bulgarian National Bank, 1, Knyaz Alexander ? Sq., 1000 Sofia, Bulgaria.); Christin Hartmann (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Harald Stahl (Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Suzanne Linehan (Central Bank and Financial Services Authority of Ireland,Dame Street, Dublin 2, Ireland.); Hiona Balfoussia (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Stelios Panagiotou (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); María de los Llanos Matea (Banco de España, Alcalá 50, E-28014 Madrid, España.); Luis J. Alvarez (Banco de España, Alcalá 50, E-28014 Madrid, España.); Pierre-Michel Bardet-Fremann (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Nicoletta Berardi (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Patrick Sevestre (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Emanuela Ciapanna (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Concetta Rondinelli (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Demetris Kapatais (Central Bank of Cyprus, 80, KENNEDY AVENUE, CY-1076 NICOSIA, Cyrpus); Eric Walch (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Patrick Lünnemann (Banque centrale du Luxembourg; 2, boulevard Royal; L-2983 Luxembourg, Luxembourg.); Sandra Zerafa (Central Bank of Malta, Pjazza Kastilja, Valletta, VLT 1060, MALTA.); Christopher Pace (Central Bank of Malta, Pjazza Kastilja, Valletta, VLT 1060, MALTA.); Jasper Kieft (De Nederlandsche Bank, Westeinde 1, 1017 ZN Amsterdam, the Netherlands.); Friedrich Fritzer (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.); Fatima Cardoso (Banco de Portugal, Av. Almirante Reis, 71 – 8°, 1150-012 Lisboa, Portugal.); Mateja Gabrijelcic (BANK OF SLOVENIA, Slovenska 35, 1505 Ljubljana, Slovenija); Branislav Karma (Narodna banka Slovenska, Imricha Karvasa 1, 813 25 Bratislava); Jarkko Kivistö (Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland.) |
| Abstract: | The distributive trades, consisting of wholesaling and retailing, are a key sector of the economy. As the main interface between producers and consumers, the sector is particularly important from a monetary policy point of view: this is where most consumer goods prices are ultimately set. Despite almost 20 years of the Single Market, mark-ups in the distributive trades sector can still be substantial and differ considerably across countries, while cross-border trade remains limited. This report examines the structural features of the distributive trades sector which are likely to play an important role in determining price level and infl ation differences across countries. JEL Classification: |
| Keywords: | Prices, trades, euro area |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20110128&r=opm |