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on Open MacroEconomics |
| By: | Gopinath, Gita; Itskhoki, Oleg; Neiman, Brent |
| Abstract: | We document the behavior of trade prices during the Great Trade Collapse of 2008-2009 using transaction-level data from the U.S. Bureau of Labor Statistics. First, we find that differentiated manufactures exhibited marked stability in their trade prices during the large decline in their trade volumes. Prices of non-differentiated manufactures, by contrast, declined sharply. Second, while the trade collapse was much steeper among differentiated durable manufacturers than among non-durables, prices in both categories barely changed. Third, the frequency and magnitude of price adjustments at the product level changed with the onset of the crisis, consistent with a state-dependent view of price adjustment. The quantitative magnitudes of the changes, however, were not pronounced enough to affect aggregate prices. Our findings present a challenge for theories of the trade collapse based on cost shocks specific to traded goods that work through prices. |
| Keywords: | Durable Goods; Global Trade Collapse; Great Recession; Import and Export Prices |
| JEL: | F10 F14 F44 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9158&r=opm |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Sami Alpanda (Bank of Canada, Ottawa, Ontario, Canada) |
| Abstract: | This paper investigates the transmission mechanism of financial shocks across large economies. To quantify these effects, we construct and estimate a two-region open economy DSGE model with nominal and real rigidities. We model the financial side of the economies using the financial accelerator mechanism of Bernanke et al. (1999). We find that the baseline model fails to generate the high degree of macroeconomic correlation between the U.S. and Euro Area economies. Allowing for an ad hoc, cross-regional correlation in financial shocks considerably improves the model’s ability to replicate the spill-over effects of U.S. financial shocks. We then extend the baseline model by including global banking and generate an endogenous, crossregional correlation of cost of capital. Simulations demonstrate a larger Euro Area response to U.S. shocks and highlight the importance of including frictions in international financial contracts, and not only in domestic financial contracts, for more accurately capturing the international transmission of domestic shocks. |
| Keywords: | DSGE, financial accelerator, international business cycles, global banks |
| JEL: | E32 E44 F33 F44 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2012-06&r=opm |
| By: | Mumtaz, Haroon (Bank of England); Theodoridis, Konstantinos (Reserve Bank of New Zealand) |
| Abstract: | This paper proposes an empirical model which can be used to estimate the impact of changes in the volatility of shocks to US real activity on the UK economy. The proposed empirical model is a structural VAR where the volatility of structural shocks is time varying and is allowed to affect the level of endogenous variables. Using this extended SVAR model we estimate that a one standard deviation increase in the volatility of the shock to US real GDP leads to a decline in UK GDP growth of 0.1% and a 0.1% increase in UK CPI inflation. We then use a non-linear small open economy New Keynesian business cycle model calibrated to US/UK economies to investigate what kind of stochastic volatility shocks can deliver such behaviour. We find that shocks that generate marginal cost uncertainty – such as foreign wage mark-up and productivity stochastic volatility shocks – can reproduce the macroeconomic aggregate responses obtained by the empirical model. An increase in uncertainty, associated with foreign demand shocks on the other hand has a negligible impact on the domestic economy. |
| Keywords: | Stochastic volatility; Gibbs sampling; DSGE model |
| JEL: | C32 F42 |
| Date: | 2012–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0463&r=opm |
| By: | Luis Felipe Céspedes; Roberto Chang; Andrés Velasco |
| Abstract: | This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. The exchange rate can affect the financial intermediaries' international credit limit via a net worth effect and a leverage ratio effect; the latter is novel and depends on the equilibrium link between exchange rates and interest spreads. Unconventional policies are nonneutral if and only if financial constraints are binding in equilibrium. Credit programs are more effective if targeted towards financial intermediaries rather than the corporate sector. Sterilized foreign exchange interventions matter because the increased availability of tradables, resulting from the sterilizing credit, can relax financial frictions; this perspective is new in the literature. Finally, self fulfilling expectations can lead to the coexistence of financially constrained and unconstrained equilibria, justifying a policy of defending the exchange rate and the accumulation of international reserves. |
| JEL: | E58 F34 F41 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18431&r=opm |
| By: | Ana Santacreu (INSEAD) |
| Abstract: | Countries that trade more with each other tend to have more correlated business cycles. Yet, traditional international business cycle models predict a much weaker link between trade and business cycle comovement. We propose that the international diffusion of technology through trade in varieties may be driving the observed comovement by increasing the correlation of total factor productivity (TFP). Our hypothesis is that business cycles should be more correlated between countries that trade a wider variety of goods. We find empirical support for this hypothesis. After decomposing trade into its extensive and intensive margins, we find that the extensive margin explains most of the trade–TFP and trade–output comovement. This result is striking because the extensive margin accounts for only a third of total trade. We then develop a three-country model of technology innovation and international diffusion through trade, in which TFP correlation increases with trade in varieties. A numerical exercise shows that the proposed mechanism increases business cycle synchronization relative to traditional models. Impulse responses to a TFP shock in one country reveal a strong positive effect on the output of its trading partner. Finally, our model implies a trade–output coefficient that is 40% of that observed in the data and 5 times higher than that predicted by standard models. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:34&r=opm |
| By: | Haberis, Alex (Bank of England); Lipińska, Anna (Federal Reserve Board) |
| Abstract: | In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (‘home’) in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker’s trade-off between stabilising inflation and the output gap when home and foreign goods are close substitutes. This reflects the fact that looser foreign policy leads to a relatively more appreciated home real exchange rate, which induces large expenditure switching away from home goods when goods are highly substitutable – just at a time (at the ZLB) when home policy is trying to boost demand for home goods. When goods are not close substitutes the home policymaker’s ability to stabilise the economy benefits from more stimulatory foreign policy. |
| Keywords: | Small open economy; Policy trade-offs; Trade structure; zero lower bound |
| JEL: | E58 F41 F42 |
| Date: | 2012–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0464&r=opm |
| By: | Erceg, Christopher; Lindé, Jesper |
| Abstract: | This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation. |
| Keywords: | DSGE Model; Fiscal Policy; Liquidity Trap; Monetary Policy; Open Economy Macroeconomics; Zero Bound Constraint |
| JEL: | E32 F41 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9155&r=opm |