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on Open Economy Macroeconomic |
| By: | Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi |
| Abstract: | How should monetary policy respond to a global liquidity trap," where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect. |
| Keywords: | Zero interest rate policy, two-country model, international spillover, monetary policy coordination |
| JEL: | E52 E58 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:csg:ajrcwp:1304&r=opm |
| By: | Gianluca Benigno; Luca Fornaro |
| Abstract: | This paper presents a model of financial resource curse, i.e. episodes of abundant access to foreign capital coupled with weak productivity growth. We study a two-sector, tradable and non-tradable, small open economy. The tradable sector is the engine of growth, and productivity growth is increasing in the amount of labor employed by firms in the tradable sector. A period of large capital inflows, triggered by a fall in the interest rate, is associated with a consumption boom. While the increase in tradable consumption is financed through foreign borrowing, the increase in non-tradable consumption requires a shift of productive resources toward the non-tradable sector at the expenses of the tradable sector. The result is stagnant productivity growth. We show that capital controls can be welfare-enhancing and can be used as a second best policy tool to mitigate the misallocation of resources during an episode of financial resource curse. |
| Keywords: | Capital flows, capital controls, financial resource curse, endogenous growth |
| JEL: | F32 F34 F36 F41 F43 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1217&r=opm |
| By: | Robert Dekle (University of Southern California (Email: dekle@usc.edu)) |
| Abstract: | We tackle the important issue of what the appropriate trends in the real Yen-Dollar andRMB-Dollar are over time. Over the long-run, the real yen has been appreciating against the U.S. dollar; while the real RMB-dollar rate has been depreciating (until 1999). In this paper, we build a macroeconomic-trade model of Japan-U.S. trade on theone hand, and China-U.S. trade on the other. Our model is essentially a general equilibrium extension of the Balassa-Samuelson effect. We show that these long-run trends in the real yen-dollar and RMB-dollar rates in the data can be justified by our model. |
| Keywords: | equilibrium real exchange rates, Balassa-Samuelson effect, structural transformation, sectoral change, productivity |
| JEL: | F3 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:13-e-02&r=opm |
| By: | Grey Gordon; Pablo Guerrón-Quintana |
| Abstract: | How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign’s ability to meet its obligations, reducing the likelihood of default and the risk premium. This effect, however, is diminishing in the stock of capital because capital also tames the severity of the contraction following default, making autarky more appealing. Access to long-term debt and costly capital adjustment are crucial for matching business cycles. Our quantitative model delivers default episodes that mimic those observed in the data. |
| Keywords: | Investments ; Debt ; Default (Finance) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-18&r=opm |
| By: | Ahmad, Ahmad H.; Pentecost, Eric J. |
| Abstract: | Persistent international current account imbalances and real exchange rate movements have become a permanent feature of the world economy. This paper, therefore, sets out to investigate the relationship between the real exchange rate and current account dynamics of eleven African countries, using data from 1980 to 2008, based on a stochastic Mundell-Fleming model in which shocks to real exchange rates and current account have been identified as permanent and temporary. Using a bi-variate structural VAR approach, the results are in consonant with the theoretical model, with permanent shocks having permanent and positive effects on both the current account and the real exchange rates. On the other hand, while temporary shocks have insignificant effects on the real exchange rates, they have very different effects on the current accounts of different countries. |
| Keywords: | real exchange rates; current accounts; structural var |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:32981&r=opm |