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on Open Economy Macroeconomic |
| By: | Jonathan Heathcote; Fabrizio Perri |
| Abstract: | This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare. |
| Keywords: | Risk ; Business cycles |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:480&r=opm |
| By: | Ju, Jiandong; Shi, Kang; Wei, Shang-Jin |
| Abstract: | In partial equilibrium, a reduction in import barriers may be thought to lead to an increase in imports and a reduction in trade surplus. However, the general equilibrium effect can go in the opposite direction. We study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. We show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, efficient trade reforms can contribute to global current account imbalances, but these imbalances do not need policy |
| JEL: | F3 F4 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9293&r=opm |
| By: | Mariko Hatase (Bank of Japan); Mototsugu Shintani (Deaprtment of Economics, Vanderbilt University); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | The Great East Japan Earthquake in 2011, as well as the Great Hanshin-Awaji Earthquake in 1995 and the Great Kanto Earthquake in 1923, resulted in disorderly movements of yen in the foreign exchange market. This paper investigates the exchange rate volatility shift after these three great earthquakes in Japan and examines if similar excess volatility after major earthquakes can also be observed in other countries. In addition, using a unique daily data set from the Great Kanto Earthquake period, the episode with the largest increased volatility among all three great earthquakes, we estimate a reaction function of foreign exchange market intervention, and evaluate the role of government intervention in stabilizing the foreign exchange market during the time of increased uncertainty caused by a large unexpected negative shock in the economy. |
| Keywords: | foreign exchange intervention, natural disasters, propensity score |
| JEL: | F3 |
| Date: | 2013–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-13-00007&r=opm |
| By: | Nagayasu, Jun |
| Abstract: | We analyze and quantify the interdependence of real effective exchange rates while considering the regional location of countries. More specifically, using the dynamic hierarchical factor model (Moench et al 2011), we decompose exchange rate movements into worldwide and two regional factors as well as country-specific elements. Then we provide evidence that a substantial proportion of variation in the exchange rates is country-specific. |
| Keywords: | Real effective exchange rates, dynamic hierarchical factor model, variance decomposition |
| JEL: | F31 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45955&r=opm |
| By: | Eijffinger, Sylvester C W; Karatas, Bilge |
| Abstract: | The sovereign debt default and the linkages from banking and currency crisis have been rarely explored in the crisis literature. This study attempts to dive into this unexplored area by applying panel data binary choice model on a sample with 20 emerging countries having monthly observations for the years between 1985 and 2007. The non-linear linkages from currency and banking crises to sovereign defaults are explored by using the interactions of these crises with international illiquidity, appreciated real exchange rates and real international monetary policy rates. It is discovered that currency, banking and debt crises tend to occur simultaneously. Prior occurrence of a currency crisis increases the sovereign default probability through appreciated real exchange rates, and in countries with high short-term indebtedness the occurrence of banking crisis raises the probability of a debt crisis. |
| Keywords: | banking crisis; currency crisis; debt crisis; emerging markets |
| JEL: | F31 F41 G01 H63 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9369&r=opm |
| By: | Valentina Bruno; Hyun Song Shin |
| Abstract: | We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies. |
| JEL: | E5 F32 F33 F34 G21 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18942&r=opm |
| By: | Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Pundit, Madhavi (Economics Research Department, Asian Development Bank) |
| Abstract: | This paper analyses the extent to which financial integration impacts the manner in which terms of trade affct business cycles in emerging economies. Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle. |
| Keywords: | Macroeconomics ; Real business cycles ; Emerging market DSGE models ; Volatility ; Terms of trade |
| JEL: | F4 E32 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:13/120&r=opm |
| By: | Gabrisch, Hurbert (Halle Institute for Economic Research); Orlowski, Lucjan (John F. Welch College of Business, Sacred Heart University); Pusch, Toralf (Halle Institute for Economic Research) |
| Abstract: | This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ÔpushÕ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk. |
| Keywords: | Sovereign Default Risk, Euro area, Public Debt, Liquidity Risk, Counter-party Risk. |
| JEL: | E43 E63 G12 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:she:wpaper:2012002&r=opm |
| By: | Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics)); Giorgio Fabbri (EPEE, Université d’Evry-Val-d’Essonne (TEPP, FR-CNRS 3126)); Patrick A. Pintus (Aix-Marseille University (Aix-Marseille School of Economics), Institut Universitaire de France) |
| Abstract: | This paper aims at clarifying the conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on the capital-deepening effect of financial globalization in an open-economy AK model and we show that collateral-constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth - long-run gain - are shown to be robust to relaxing the assumption of investment commitment, which generates growth breaks and hampers welfare. For reasonable parameter values and relative to autarky, welfare gains range from about 2% in middle-income countries to about 13% in OECD-type countries under international Financial integration. Sizeable benefits emerge despite the fact that consumption falls when the economy switches from autarky to financial integration - short-run pain - which is however shown not to dwarf positive welfare changes. |
| Keywords: | International Financial Integration, Collateral-Constrained Borrowing, Welfare Gains, Growth Breaks, Leapfrogging |
| JEL: | F34 F43 O40 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:12-14&r=opm |
| By: | Dmitriev, Mikhail; Hoddenbagh, Jonathan |
| Abstract: | We study the optimal design of a fiscal union within a currency union using an open economy model with nominal rigidities. We show that the optimal design of a fiscal union depends crucially on the degree of financial integration across countries as well as the elasticity of substitution between domestic and foreign goods. Empirical estimates of substitutability range between 1 and 12. If substitutability is low (around 1), risk-sharing occurs naturally via terms of trade movements even in financial autarky, country-level monopoly power is high and losses from terms of trade externalities dominate other distortions. On the other hand, if substitutability is high (greater than 1), risk-sharing does not occur naturally via terms of trade movements, country-level monopoly power is low and losses from nominal rigidities dominate other distortions. We show that members of a fiscal union should (1) coordinate labor and consumption taxes when substitutability is low to eliminate terms of trade distortions, and (2) coordinate contingent cross-country transfers when substitutability is high to improve risk-sharing, particularly when union members lose access to international financial markets. Contingent fiscal policy at the national level is also necessary to eliminate nominal rigidities in the presence of asymmetric shocks, and yields large welfare gains when goods are close substitutes. |
| Keywords: | Fiscal Union, International Macroeconomics |
| JEL: | E5 E58 F41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46007&r=opm |
| By: | Gordon Menzies (Economics Discipline Group, University of Technology, Sydney); Xiaolin Xiao (Economics Discipline Group, University of Technology, Sydney) |
| Abstract: | The departure of a factor in excess supply in the non-traded sector leads to a real appreciation, in a setup that combines the canonical Lewis Model (Lewis, 1954, and Fei and Ranis, 1961, 1964) with a Balassa-Samuelson traded/non-traded dichotomy (Obstfeld and Rogoff, 1996). China is a potential candidate for non-traded factor appreciation, since it has not completed its structural transformation. A transfer of rural labor to urban areas will appreciate the real exchange rate. |
| Keywords: | Non-traded factor appreciation; Lewis Dual-economy; China |
| JEL: | F21 F31 F41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2&r=opm |
| By: | Antonelli Cristiano; Fassio Claudio (University of Turin) |
| Abstract: | The paper provides an interpretative framework and structured empirical evidence of the processes leading to the emergence of a light and slow growth economy in advanced countries. The interpret ative framework rests upon the grafting of a) the Schumpeterian hypothesis about the determinants of the rate of technological change with b) the Kuznets approach on the strict complementarity of structural and technological change, and c) the new approach about the direction of technological change biased towards the most intensive use of locally abundant production factors, into d) the dynamic version of the Heckesher-Ohlin analysis of international economics that accounts the introduction of new technologies as the endogenous search for a new specialization. The analysis of the stylized facts and the empirical evidence confirms that the twin globalization of product and capital markets brought about by the entry of new labor abundant countries in international markets had profound effects on advanced countries leading to the introduction of skill biased technological change with the consequent decline of the role of the manufacturing industry and the emergence of a strong knowledge intensive business service sector. The new biased direction of technological change accelerated the substitution of both capital and unskilled labor with skilled workers with the ultimate effect of reducing the stock of working capital and hence the rates of growth of advanced economies. The slow growth is a physiological feature of the new emerging light economies that rely upon knowledge intensive but capital saving technologies |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:uto:dipeco:201307&r=opm |
| By: | Catão, Luis A. V.; Fostel, Ana; Rancière, Romain |
| Abstract: | The recent Eurozone debt crisis has witnessed sharp decouplings in cross-country bond yields without commensurate shifts in relative fundamentals. We rationalize this phenomenon in a model wherein countries with different fundamentals are on different equilibrium paths all along, but which become discernable only during bad times. Key ingredients are cross-country differences in the volatility and persistence of fiscal revenue shocks combined with asymmetric information on country-specific fiscal shocks. Differences in the cyclicality of fiscal revenues affect the option value of borrowing and resulting default risk; unobservability of fiscal shocks makes bond pricing responsive to market actions. When tax revenues are hit by common positive shocks, no country increases net debt and interest spreads stay put. When a common negative revenue shock hits and is persistent, low volatility countries adjust spending while others resort to borrowing. This difference signals a relative deterioration of fiscal outlooks, interest spreads jump and decoupling takes place. |
| Keywords: | Default; Eurozone Debt Crisis; Fiscal Gaps; Information Asymmetry; Perfect Bayesian Equilibrium; Pesistence; Sovereign Debt; Volatility |
| JEL: | E62 F34 G15 H3 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9368&r=opm |
| By: | William D. Craighead (Department of Economics, Wesleyan University); David R. Hineline |
| Abstract: | This paper examines the compositional changes that occur in economies experiencing current account reversals using sectoral-level data on output and employment growth around 55 reversal episodes. The experiences of developing and industrialized countries are compared, and the role of currency crises is also examined. Labor market adjustments following reversals is developing countries is shown to differ from that of industrialized economies. The possibility that this difference is related to labor market informality is briefly examined. |
| JEL: | F3 F4 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2013-001&r=opm |