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on Open MacroEconomics |
| By: | Benigno, Gianluca; Fornaro, Luca |
| Abstract: | We present a model that reproduces two salient facts characterizing the international monetary system: i) Faster growing countries are associated with lower net capital inflows and ii) Countries that grow faster accumulate more international reserves and receive more net private inflows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. This generates a positive link between reserve accumulation, growth and current account surpluses. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. We use the model to compare the laissez-faire equilibrium and the optimal reserve policy in an economy that is opening to international capital flows. We find that the optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. We also find that the welfare gains of reserve policy are large, in the order of 1% of permanent consumption equivalent. |
| Keywords: | financial crises; foreign reserve accumulation; gross capital flows; growth |
| JEL: | F31 F32 F41 F43 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9224&r=opm |
| By: | Alberto Cavallo; Brent Neiman; Roberto Rigobon |
| Abstract: | We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregate implications. First, in contrast to the prior literature, we demonstrate that the law of one price holds perfectly within the euro zone for thousands of goods sold by each of the retailers. Second, we find large deviations from the law of one price for these same goods outside of currency unions, even when the nominal exchange rate is pegged. For example, the Danish krone is pegged to the euro but Danish prices differ markedly from those in the euro zone countries. The reason is that about three-quarters of the magnitude of law of one price deviations reflects differences in prices at the time goods are first introduced, as opposed to the component emerging from incomplete passthrough or from nominal rigidities. Third, we show that good-level real exchange rates measured at the time goods are first introduced move with the nominal exchange rate. This implies that aggregate real exchange rate volatility and persistence is due neither to the omission of introduction prices nor to price stickiness. |
| JEL: | E3 F3 F4 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18563&r=opm |
| By: | Geert Bekaert; Alexander Popov |
| Abstract: | In a sample of 110 countries, we document a positive relation between the volatility and skewness of growth in the cross-section, but a negative relation in panel data with country fixed effects. The negative relation between volatility and skewness in panel data is driven by business cycle variation in rich countries. The long-run cross-sectional relation is related to two distinct phenomena: sudden and short-lived growth spurts in mostly developing countries, and sharp crises in mostly developed countries, following the build-up of leverage during low-volatility periods. The former phenomenon is driven by one of the following events in mostly developing countries: industrialization, macroeconomic stabilisation, and the discovery and exploitation of natural resources. The latter phenomenon is consistent with recent theories of financial frictions. |
| JEL: | E32 G10 O10 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18556&r=opm |
| By: | Luis Catão; Roberto Chang |
| Abstract: | We develop a dynamic model of a small open economy that trades commodities whose world prices are subject to realistic random fluctuations, and study the implications of monetary policy alternatives. The model is much more flexible than those of previous studies, especially in allowing to compare perfect risk sharing against financial autarky. In each case we show how to derive analytically optimal Ramsey allocations and flexible price allocations, and hence to examine the crucial role of behavioral elasticities, production structure, and capital mobility in determining the welfare properties of different monetary choices. Applying these insights to a calibrated example, we find that the impulse responses associated with PPI targeting track flexible price allocations closely, but can diverge greatly from the Ramsey allocations, especially when risk sharing is perfect and the elasticity of demand for exports of a home aggregate is high. In those cases, policies that stabilize the real exchange rate more than PPI targeting, such as targeting expected inflation, deliver higher welfare. But PPI targeting is the clear winner under portfolio autarky. |
| JEL: | E52 F41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18536&r=opm |
| By: | Barry Eichengreen (Asian Development Bank Institute (ADBI)) |
| Abstract: | The rise of regional monetary arrangements poses a challenge for the International Monetary Fund (IMF)'s global surveillance efforts. This paper reviews how the IMF has responded to earlier regional initiatives, from the European Payments Union of the 1950s and the Gold Pool of the 1960s to the CFA franc zone and the European Monetary System. The penultimate section draws out the implications for monetary regionalism in East Asia. |
| Keywords: | Regional monetary arrangements, IMF, global surveillance, East Asia |
| JEL: | F30 F53 F55 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23354&r=opm |
| By: | Kristina Spantig (Graduate Programme "Global Financial Markets") |
| Abstract: | The paper scrutinizes the spillover effects of expansionary monetary policies of a center economy to the macroeconomic policies of periphery countries, dependent on the exchange rate regime. In particular the impact of the US quantitative easing on the Chinese economy is analysed. The results suggest that the exchange rate regime plays a minor role in insulating the economies at the periphery of the world monetary system from monetary policy shocks in the center. The only exception is capital controls which enable the periphery countries, in particular China, to maintain a certain degree of monetary independence in the short run. In the long run a closer Chinese-European policy coordination is argued to create a counterbalance to the predominance of the US dollar in the currently asymmetric world monetary system. This would provide an incentive to the US to phase out undue monetary expansion. |
| Keywords: | monetary policy, excess liquidity, spillovers, US, China |
| JEL: | E31 E42 E52 E61 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:33-2012&r=opm |
| By: | Takatoshi Ito; Kenta Yamada; Misako Takayasu; Hideki Takayasu |
| Abstract: | Using the “firm” quotes obtained from the tick-by-tick EBS (electronic broking system that is a major trading platform for foreign exchanges) data, it is found that risk-free arbitrage opportunities—free lunch—do occur in the foreign exchange markets, but it typically last only a few seconds. “Free lunch” is in the form of (a) negative spreads in a currency pair and (b) triangular arbitrage relationship involving three currency pairs. The latter occur much more often than the former. Such arbitrage opportunities tend to occur when the markets are active and volatile. Over the 12-year, tick-data samples, the number of free lunch opportunities has dramatically declined and the probability of the opportunities disappearing within one second has steadily increased. The size of expected profits is higher than transaction costs; trades that simultaneously take place on both sides of ask and bid (or three currency trades in case of triangular arbitrage) occur more often when free lunch appeared one second earlier than otherwise, suggesting that free lunch opportunities are actively taken. The probability of its disappearance within one second was less than 50% in 1999, but increased to about 90% by 2009. Less frequent occurrence and quicker disappearance in recent years are attributable to changes in trading microstructure: an introduction and proliferation of the Primary Customer system (weaker banks can use stronger banks’ credit lines) and of direct connection of traders’ programmed computers to the EBS computer. |
| JEL: | F31 G12 G14 G15 G23 G24 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18541&r=opm |
| By: | Guglielmo Maria Caporale; Alessandro Girardi |
| Abstract: | This paper adopts a flexible framework to assess both short- and long-run business cycle linkages between six Latin American (LA) countries and the four largest economies in the world (namely the US, the Euro area, Japan and China) over the period 1980:I-2011:IV. The result indicate that within the LA region there are considerable differences between countries, success stories coexisting with extremely vulnerable economies. They also show that the LA region as a whole is largely dependent on external developments, especially in the years after the great recession of 2008 and 2009. The trade channel appears to be the most important source of business cycle co-movement, whilst capital flows are found to have a limited role, especially in the very short run. |
| Keywords: | International business cycle, Latin America, VAR models, trade and financial linkages |
| JEL: | C32 E32 F31 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1254&r=opm |
| By: | Neil R. Ericsson (Board of Governors of the Federal Reserve System); Erica L. Reisman (Board of Governors of the Federal Reserve System) |
| Abstract: | Global vector autoregressions (GVARs) have several attractive features: multiple potential channels for the international transmission of macroeconomic and financial shocks, a standardized economically appealing choice of variables for each country or region examined, systematic treatment of long-run properties through cointegration analysis, and flexible dynamic specification through vector error correction modeling. Pesaran, Schuermann, and Smith (2009) generate and evaluate forecasts from a paradigm GVAR with 26 countries, based on Dées, di Mauro, Pesaran, and Smith (2007). The current paper empirically assesses the GVAR in Dées, di Mauro, Pesaran, and Smith (2007) with impulse indicator saturation (IIS)—a new generic procedure for evaluating parameter constancy, which is a central element in model-based forecasting. The empirical results indicate substantial room for an improved, more robust specification of that GVAR. Some tests are suggestive of how to achieve such improvements. |
| Keywords: | cointegration, error correction, forecasting, GVAR, impulse indicator saturation, model design, model evaluation, model selection, parameter constancy, VAR |
| JEL: | C32 F41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:gwc:wpaper:2012-006&r=opm |
| By: | Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat (Larefi, Université Bordeaux IV) |
| Abstract: | The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on good and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at the global level has spillover effects on output and price level in emerging countries. The impact on real estate and commodity prices in emerging countries is less clear. |
| Keywords: | Global liquidity, excess liquidity indicators, crises indicators, emerging countries, financial crisis |
| JEL: | E44 E52 F3 G01 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:laf:wpaper:cr1203&r=opm |
| By: | Dreger, Christian; Reimers, Hans-Eggert |
| Abstract: | We analyse the relationship between the debt to GDP ratio and real per capita GDP growth for the euro area members by distinguishing between periods of sustainable and non-sustainable debt. Thresholds are theory-based and depend on the macroeconomic framework. If the interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable debt ratio. The negative impact of the debt to GDP ratio is particularly strong for non sustainable ratios and especially relevant for the euro area. This suggests that the participation in monetary union might entail an additional risk for its members. -- |
| Keywords: | Euro area debt crisis,debt sustainability |
| JEL: | F43 O11 C23 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:euvwdp:327&r=opm |
| By: | Udaibir S. Das (Asian Development Bank Institute (ADBI)); Maria A. Oliva; Takahiro Tsuda |
| Abstract: | We examine some of the macro-financial dimensions of sovereign risk and propose a conceptual framework that captures risks other than just the default risk. Morphed under a multi-dimensional notion of sovereign risk, we argue that the existing empirical methodologies to measure sovereign risk cover only partial aspects of sovereign risk and fail to capture its macro-financial dimensions. We highlight a menu of tools that could be used to tackle the broader notion of sovereign risk, and suggest that authorities should actively use them to manage the macro-financial dimensions of sovereign risk before those risks feed into the real economy. |
| Keywords: | sovereign risk, macro-financial dimensions, default risk |
| JEL: | F30 F34 E43 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23344&r=opm |
| By: | Canofari Paolo; Marini Giancarlo; Piersanti Giovanni |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0094&r=opm |