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on Open MacroEconomics |
| By: | Julien Bengui; Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | This paper investigates whether the international globalization of financial markets allows for significant cross-country risk-sharing at the business cycle frequency. We find that cross-country risk-sharing is still limited and this is unlikely to be the result of financial frictions that limit state-contingent contracts. Part of the limited international risk sharing could be the consequence of frictions that de-facto reduce the short-term mobility of financial capital. But even with these frictions we find significant divergence between model predictions and the data. |
| JEL: | F36 F44 G15 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18372&r=opm |
| By: | Michael D. Bauer; Christopher J. Neely |
| Abstract: | Previous research has established that the Federal Reserve large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper analyzes the channels through which these effects occurred. We use dynamic term structure models to decompose international yield changes into changes in term premia and expected short rates. The conclusions for most countries are model dependent. Models that impose a unit root tend to imply large signaling effects for Australia, Canada, Germany and the United States. Models that do not restrict persistence imply negligible signaling effects for any country. Our preferred bias-corrected model implies large signaling effects for Canada and the United States. The idea that LSAP announcements signal information about Canadian rates is intuitively attractive because conventional US monetary policy shocks strongly predict Canadian rates. |
| Keywords: | Monetary policy ; Bonds ; International finance |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-028&r=opm |
| By: | Gerardo della Paolera; Alan M. Taylor |
| Abstract: | This paper examines sovereign lending to Latin America and the Caribbean from 1820 to 1913. We examine four waves of capital flows where defaults were followed by a return to market access. In spite of extended default, countries kept promising high returns that attracted international investors again and again: financial autarky thus gave way to eras of high integration to global markets as measured by sovereign risk pricing. We discuss imperfections of the sovereign debt institutional context in the region and discuss a menu of options that some countries used to seek funds in the global financial markets after defaults. The parallel with the modern Latin American and Caribbean sovereign bond market experience is striking. |
| JEL: | F34 H63 N16 N26 N46 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18363&r=opm |
| By: | Kristin Forbes (MIT-Sloan School of Management, 50 Memorial Drive, Cambridge, Massachusetts 02142, USA and NBER); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR); Thomas Kostka (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany); Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | We use changes in Brazil’s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil’s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling —i.e. changes in investor expectations about future policies— rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries. JEL Classification: F3, F4, F5, G0, G1 |
| Keywords: | Capital controls, externalities, spillovers, portfolio effects, signalling, mutual funds, Brazil, emerging markets |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121456&r=opm |
| By: | Loukas Karabarbounis |
| Abstract: | This paper explores implications of non-separable preferences with home production for international business cycles. Home production induces substitution effects that break the link between market consumption and its marginal utility and help explain several stylized facts of the open economy. In an estimated two-country model with complete asset markets in which home production generates a labor wedge that mimics its empirical counterpart, output is more correlated than consumption across countries, labor inputs and labor wedges are positively correlated across countries, and relative market consumption is negatively related to the real exchange rate. International time use surveys corroborate predictions of the model, showing a significant relationship between time spent on home production, labor wedges, and real exchange rates, both at business cycle frequencies and in the cross section of countries. By contrast, non-separabilities based on leisure do not help explain variations in labor wedges or real exchange rates. |
| JEL: | E32 F41 F44 J22 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18366&r=opm |
| By: | Martin Schmitz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short and medium term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets. JEL Classification: F21, F30, G15 |
| Keywords: | International risk sharing, capital gains, cross-border investment, financial globalisation, emerging market economies |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121451&r=opm |
| By: | Anja Baum (University of Cambridge, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue Cambridge, CB3 9DD, UK); Cristina Checherita-Westphal (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany); Philipp Rother (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we extend the threshold panel methodology by Hansen (1999) to a dynamic setting in order to analyse the nonlinear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the shortrun impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings. JEL Classification: H63, O40, E62, C20 |
| Keywords: | Public debt, economic growth, scal policy, threshold analysis |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121450&r=opm |
| By: | Luca Gattini (European Investment Bank, 98-100, Boulevard Konrad Adenauer, Luxembourg L-2950); Huw Pill (Goldman Sachs, Research Department); Ludger Schuknecht (German Ministry of Finance, Wilhelmstraße 97, 10117 Berlin, Germany and European Central Bank) |
| Abstract: | This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments. JEL Classification: E31, E51, E62, C32, F42 |
| Keywords: | VAR, global inflation, global house prices, global money |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121462&r=opm |
| By: | Siklos, Pierre L. (BOFIT) |
| Abstract: | Even before the events of the past few years, economists and policy makers were musing about the apparent contradiction between globalization, as it is generally understood, and the seemingly different paths in overall economic activity taken by the emerging and more mature economies of the world. The present paper reconsiders whether it is, in fact, useful to think of correlations in business cycle movements as reflecting some form of coupling or decoupling and, instead, suggests that, even if business cycles may well have become more synchronous for a time, it is more useful to think of international business cycle co-movements as reflecting their mutual dependence that can be subjected to short-run interruptions or affected by a variety of other economic factors. I report evidence based on factor-augmented quantile regressions for a panel of annual data since 1980 from 9 regions of the world. A panel is used to estimate the common factors which are then applied to the quantile regression model to determine the sources of business cycle co-movements across countries and regions of the world. |
| Keywords: | business cycles; quantile regression; panel estimation; factor model; coupling; decoupling |
| JEL: | C21 C22 C23 E32 |
| Date: | 2012–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_017&r=opm |
| By: | Jacob Gyntelberg; Subhanij Tientip; Mico Loretan |
| Abstract: | We demonstrate empirically that not all capital flows influence exchange rates equally: Capital flows induced by foreign investors’ stock market transactions have both an economically significant and a permanent impact on exchange rates, whereas capital flows induced by foreign investors’ transactions in government bond markets do not. We relate these differences in the price impact of capital flows to differences in the amounts of private information conveyed by these flows. Our empirical findings are based on novel, daily-frequency datasets on prices and quantities of all transactions of foreign investors in the stock, bond, and onshore FX markets of Thailand. |
| Date: | 2012–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/213&r=opm |
| By: | Alun H. Thomas |
| Abstract: | The paper considers the determinants of exchange rate movements among sub-Saharan countries that have flexible exchange rate regimes. The determinants are based on the law of one price and interest parity conditions. Results indicate that the exchange rates have responded significantly to changes in the US Treasury bill rate and to the EMBI spread in recent years. The effects are more important for countries with open capital accounts. On the other hand the paper does not provide any support for the interest rate parity theory because domestic interest rates have no bearing on exchange rate movements. |
| Keywords: | Exchange rates , Flexible exchange rate policy , Floating exchange rates , Interest rates , Sub-Saharan Africa , |
| Date: | 2012–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/208&r=opm |
| By: | Jacob Gyntelberg; Subhanij Tientip; Mico Loretan |
| Abstract: | We present empirical evidence that the Thai baht’s value is driven in part by investors’ cross-border equity portfolio rebalancing decisions. Our results are based on comprehensive datasets of FX and stock market transactions undertaken by nonresident investors in Thailand in 2005 and 2006. Higher returns in the stock market relative to a reference stock market are associated with net sales of equities by these investors and a depreciation of the Thai baht. Net purchases of Thai equities lead to an appreciation of the Thai baht. Foreign investors do not appear to hedge the foreign exchange risk related to their stock market positions. |
| Date: | 2012–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/214&r=opm |