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on Open MacroEconomics |
| By: | Maurice Obstfeld |
| Abstract: | Do global current account imbalances still matter in a world of deep international financial markets where gross two-way financial flows often dwarf the net flows measured in the current account? Contrary to a complete markets or “consenting adults” view of the world, large current account imbalances, while very possibly warranted by fundamentals and welcome, can also signal elevated macroeconomic and financial stresses, as was arguably the case in the mid-2000s. Furthermore, the increasingly big valuation changes in countries’ net international investment positions, while potentially important in risk allocation, cannot be relied upon systematically to offset the changes in national wealth implied by the current account. The same factors that dictate careful attention to global imbalances also imply, however, that data on gross international financial flows and positions are central to any assessment of financial stability risks. The balance sheet mismatches of leveraged entities provide the most direct indicators of potential instability, much more so than do global imbalances, though the imbalances may well be a symptom that deeper financial threats are gathering. |
| JEL: | F32 F34 F36 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17877&r=opm |
| By: | Pau Rabanal; Juan F. Rubio-Ramirez |
| Abstract: | Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott filter is applied to both. A simple two-country, two-good model, as described in Heathcote and Perri (2002), can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. Finally, we show that the introduction of adjustment costs in production and in portfolio holdings allows us to reconcile theory and this feature of the data. |
| Keywords: | Business cycles , Economic models , Real effective exchange rates , |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/13&r=opm |
| By: | Andrade, P.; Zachariadis, M. |
| Abstract: | A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. We find that global shocks have more persistent effects on prices as compared to local ones e.g. prices respond faster to local macro shocks than to global micro ones, implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. Global macro shocks have the most persistent effect on prices, with the majority of goods and locations sharing a single source of trend over time stemming from these shocks. Finally, both local macro and local micro shocks are associated with relatively fast price convergence. |
| Keywords: | global shocks, local shocks, micro shocks, macro shocks, price adjustment, micro-macro gap, price-setting models, micro prices. |
| JEL: | E31 F4 C23 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:365&r=opm |
| By: | Kamiar Mohaddes; Mehdi Raissi; Tiago Cavalcanti |
| Abstract: | This paper studies the impact of the level and volatility of the commodity terms of trade on economic growth, as well as on the three main growth channels: total factor productivity, physical capital accumulation, and human capital acquisition. We use the standard system GMM approach as well as a cross-sectionally augmented version of the pooled mean group (CPMG) methodology of Pesaran et al. (1999) for estimation. The latter takes account of cross-country heterogeneity and cross-sectional dependence, while the former controls for biases associated with simultaneity and unobserved country-specific effects. Using both annual data for 1970-2007 and five-year non-overlapping observations, we find that while commodity terms of trade growth enhances real output per capita, volatility exerts a negative impact on economic growth operating mainly through lower accumulation of physical capital. Our results indicate that the negative growth effects of commodity terms of trade volatility offset the positive impact of commodity booms; and export diversification of primary commodity abundant countries contribute to faster growth. Therefore, we argue that volatility, rather than abundance per se, drives the "resource curse" paradox. |
| Keywords: | Commodity price fluctuations , Commodity prices , Economic growth , Economic models , Productivity , Terms of trade , |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/12&r=opm |
| By: | Karen K. Lewis; Edith X. Liu |
| Abstract: | International consumption risk sharing studies have largely ignored their models' counterfactual implications for asset returns although these returns incorporate direct market measures of risk. In this paper, we modify a canonical risk-sharing model to generate more plausible asset return behavior and then consider the effects on welfare gains. Matching the mean and variance of equity returns and the risk-free rate requires persistent consumption risk, leading to three main findings: (1) risk-sharing gains decrease as the ability to diversify persistent consumption risk decreases; (2) the international correlation of equity returns is high relative to the correlation of consumption and dividends, implying low diversification potential for persistent consumption risk; and (3) increasing persistent consumption risk reduces the gains. Taken together, our findings suggest that asset returns imply more international risk sharing than previously thought. |
| JEL: | E21 F30 F40 G15 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17872&r=opm |
| By: | Charalambos G. Tsangarides; Atish R. Ghosh; Jonathan David Ostry |
| Abstract: | Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time—vulnerability to current account shocks was relatively important in the 1980s but, as EMEs have become more financially integrated, factors related to the magnitude of potential capital outflows have gained in importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country’s position in the global reserves distribution. High reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks, and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons. |
| Date: | 2012–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/34&r=opm |
| By: | Zhao, Yan |
| Abstract: | The countercyclical trade balance ratio is one of the key stylized facts for open economies. The magnitude differs from country to country. Specifically, the trade balance ratio is more negatively correlated with output in emerging economies than in developed economies, suggesting that the trade balance is more sensitive to output changes in the former group. This paper explores whether this difference is caused by international borrowing constraints imposed on emerging economies. By modeling the borrowing constraints as conditional on macroeconomic performance, the paper shows that when a positive shock takes place in emerging economies, $GDP$ increases and the borrowing constraint becomes less binding, which results in less incentive to accumulate foreign assets. When a negative shock is present, in contrast, $GDP$ decreases, and the representative household has to increase the trade balance to avoid the possibly binding borrowing constraints. |
| Keywords: | borrowing constraint; trade balance-output comovement |
| JEL: | F41 F47 |
| Date: | 2011–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36902&r=opm |
| By: | Joshua Aizenman; Kenta Inoue |
| Abstract: | We study the curious patterns of gold holding and trading by central banks during 1979-2010. With the exception of several discrete step adjustments, central banks keep maintaining passive stocks of gold, independently of the patterns of the real price of gold. We also observe the synchronization of gold sales by central banks, as most reduced their positions in tandem, and their tendency to report international reserves valuation excluding gold positions. Our analysis suggests that the intensity of holding gold is correlated with ‘global power’ – by the history of being a past empire, or by the sheer size of a country, especially by countries that are or were the suppliers of key currencies. These results are consistent with the view that central bank’s gold position signals economic might, and that gold retains the stature of a ‘safe haven’ asset at times of global turbulence. The under-reporting of gold positions in the international reserve/GDP statistics is consistent with loss aversion, wishing to maintain a sizeable gold position, while minimizing the criticism that may occur at a time when the price of gold declines. |
| JEL: | E58 F31 F33 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17894&r=opm |
| By: | Esteban Vesperoni; Nicolas E. Magud; Carmen Reinhart |
| Abstract: | The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that bank credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks’ incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans. |
| Date: | 2012–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/41&r=opm |
| By: | Michael Kumhof; Romain Ranciere; Claire Lebarz; Alexander W. Richter; Nathaniel A. Throckmorton |
| Abstract: | This paper studies the empirical and theoretical link between increases in income inequality and increases in current account deficits. Cross-sectional econometric evidence shows that higher top income shares, and also financial liberalization, which is a common policy response to increases in income inequality, are associated with substantially larger external deficits. To study this mechanism we develop a DSGE model that features workers whose income share declines at the expense of investors. Loans to workers from domestic and foreign investors support aggregate demand and result in current account deficits. Financial liberalization helps workers smooth consumption, but at the cost of higher household debt and larger current account deficits. In emerging markets, workers cannot borrow from investors, who instead deploy their surplus funds abroad, leading to current account surpluses instead of deficits. |
| Date: | 2012–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/8&r=opm |
| By: | Arita, Shawn; Tanaka, Kiyoyasu |
| Abstract: | During the past decade of declining FDI barriers, small domestic firms disproportionately contracted while large multinational firms experienced a substantial growth in Japan’s manufacturing sector. This paper quantitatively assesses the impact of FDI globalization on intra-industry reallocations and aggregate productivity. We calibrate the firm-heterogeneity model of Eaton, Kortum, and Kramarz (2011) to micro-level data on Japanese multinational firms. Estimating the structural parameters of the model, we demonstrate that the model can strongly replicate the entry and sales patterns of Japanese multinationals. Counterfactual simulations show that declining FDI barriers lead to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. A hypothetical 20% reduction in FDI barriers is found to generate a 30.7% improvement in aggregate productivity through market-share reallocation. |
| Keywords: | Japan, International business enterprises, Foreign investments, Manufacturing industries, Industrial management, Multinational firms, FDI, Firm heterogeneity, Investment Liberalization |
| JEL: | F10 F23 L23 R12 R30 L25 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper324&r=opm |
| By: | Jonathan Eaton; Samuel S. Kortum; Sebastian Sotelo |
| Abstract: | A recent literature has introduced heterogeneous firms into models of international trade. This literature has adopted the convention of treating individual firms as points on a continuum. While the continuum offers many advantages this convenience comes at some cost: (1) Shocks to individual firms can never have an aggregate effect. (2) It is hard to reconcile the small (sometimes zero) number of firms engaged in selling from one country to another with a continuum. (3) For such models to deliver finite solutions for aggregates, such as the price index, requires restrictions on parameter values that may not hold in the data. We show how a standard heterogeneous-firm trade model can be amended to allow for only an integer number of firms. The model overcomes the deficiencies of the continuum model enumerated above. Taking the model to aggregate data on bilateral trade in manufactures among 92 countries and to firm-level export data for a much narrower sample shows that it accounts for both the large share of a small number of firms in sales around the world and for zeros in bilateral trade data while maintaining the good fit of the standard gravity equation among country pairs with thick trade volumes. Randomness at the firm level adds substantially to aggregate variability. |
| JEL: | F1 F12 L16 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17864&r=opm |