|
on Open MacroEconomics |
| By: | Obstfeld, Maurice |
| Abstract: | In this lecture I document the proliferation of gross international asset and liability positions and discuss some of the consequences for individual countries’ external adjustment processes and for global financial stability. In light of the rapid growth of gross global financial flows and the serious risks associated with them, one might wonder about the continuing relevance of the net financial flow measured by the current account balance. I argue that global current account imbalances remain an essential target for policy scrutiny, for financial as well as macroeconomic reasons. Nonetheless, it is critically important for policymakers to monitor as well the rapidly evolving structure of global gross assets and liabilities. |
| Keywords: | current account balance; financial instability; global imbalances; international asset positions; international financial flows |
| JEL: | F32 F34 F36 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8611&r=opm |
| By: | Rudiger Ahrend; Cyrille Schwellnus |
| Abstract: | Mismatches between the supply and the demand of safe financial assets in fast-growing emerging countries have been singled out by economic theory as drivers of international capital flows and, ultimately, global current account imbalances. This paper assesses empirically the contribution of the search for safe assets to the size and composition of emerging countries’ international asset portfolios. Excess demand for safe assets in financially less-developed countries would imply that these countries hold disproportionately high shares of their total portfolios in foreign assets. Moreover, financially lessdeveloped countries would be expected to hold disproportionately high shares of their foreign portfolios in financially highly-developed countries, as ostensibly safe assets are predominantly produced by the latter. This paper finds little empirical support for these predictions. Financially less-developed countries allocate a larger proportion of their total holdings to domestic assets. Even when focusing on less-developed countries’ foreign portfolios, there is no evidence of a general bias toward the assets of financially highlydeveloped countries. Overall, asset mismatches do not appear to be significant drivers of asset allocation of financially less-developed countries. |
| JEL: | F2 F3 F4 G1 |
| Date: | 2011–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:903-en&r=opm |
| By: | Prasad, Eswar (Cornell University) |
| 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 propose a 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. |
| Keywords: | emerging markets, international investment positions, structure of external assets and liabilities, foreign exchange reserves, global liquidity insurance |
| JEL: | F3 F4 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6032&r=opm |
| By: | Aizenman, Joshua; Pinto, Brian; Sushko, Vladyslav |
| Abstract: | This paper examines how financial expansion and contraction cycles affect the broader economy through their impact on eight 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 two to three 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, the analysis finds that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of"up by the stairs, down by the elevator dynamics." |
| Keywords: | Economic Theory&Research,Achieving Shared Growth,Emerging Markets,Currencies and Exchange Rates,Debt Markets |
| Date: | 2011–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5860&r=opm |
| By: | Sarah Guillou; Stefano Schiavo |
| Abstract: | We develop a simple model where exporting firms are characterized by het- erogeneous productivity and may face a liquidity constraint, which in turn is affected by exchange rate changes. This setup is used to analyze exchange rate exposure, i.e. the sensitivity of profits to exchange rate changes, and to derive testable implications that we bring to the data. The key innovation of our setup is to assume that exchange rate changes can either boost or depress liquidity: this allows us to study exposure profits under different scenarios. We find that profits of more productive firms should be more sensitive to ex- change rate fluctuations. Moreover, an increase in the cost of external funds (relative to cash flow) makes profits less sensitive to exchange rate shocks for firms whose liquidity is positively affected by an appreciation of the exchange rate. We test these predictions derived from the model using a large dataset of French exporting firms. Results confirm that exposure tends to increase with productivity but in a non linear way. Furthermore, empirical results confirm that for firm whose cash flow is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure. |
| Keywords: | export, exchange rate, exposure, financial constraints, heterogeneity, productivity |
| JEL: | F23 F31 G32 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:1107&r=opm |
| By: | Yunfang Hu (Tohoku University); Kazuo Mino (Kyoto University) |
| Abstract: | This paper explores a dynamic two-country model with production externalities in which capital goods are not traded and international lending and borrowing are allowed. Unlike the integrated world economy model based on the Heckscher-Ohlin setting, our model yields indeterminacy of equilibrium under a wider set of parameter values than in the corresponding closed economy model. Our finding demonstrates that the assumption on trade structure would be a relevant determinant in considering the relation between globalization and economic volatility. |
| Keywords: | two-country model, non-traded goods, equilibrium indeterminacy, social constant returns |
| JEL: | F43 O41 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:791&r=opm |
| By: | Zheng Liu; Pengfei Wang; Tao Zha |
| Abstract: | We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms’ credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment. |
| Keywords: | Real property |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2011-26&r=opm |
| By: | Bandyopadhyay, Subhayu (Federal Reserve Bank of St. Louis); Lahiri, Sajal (Southern Illinois University Carbondale); Younas, Javed (American University of Sharjah) |
| Abstract: | We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level. |
| Keywords: | foreign aid, foreign loans, borrowing constraint, economic growth, fungibility, public input |
| JEL: | F34 F35 O11 O16 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6024&r=opm |