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on Open Economy Macroeconomic |
| By: | Michael B. Devereux; James Yetman |
| Abstract: | The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial markets, the problem of the zero bound introduces a new dimension to the international policy trilemma. International financial market openness may render monetary policy ineffective, even within a system of fully flexible exchange rates, because shocks that lead to a 'liquidity trap' in one country are propagated through financial markets to other countries. But monetary policy effectiveness may be restored by the imposition of capital controls, which inhibit the transmission of these shocks across countries. We derive an optimal monetary policy response to a global liquidity trap in the presence of capital controls. We further show that, even though capital controls may facilitate effective monetary policy, except in the case where monetary policy is further constrained (beyond the zero lower bound constraint), capital controls are not desirable in welfare terms. |
| JEL: | F3 F32 F33 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19091&r=opm |
| By: | Jean-François Rouillard (Département d'économique and GREDI, Université de Sherbrooke) |
| Abstract: | While business cycles of industrialized countries have become more synchronized in the past decade, the gap between cross-country correlations in output and in consumption, known as the quantity anomaly, has widened on average. A two-country real business cycle model with national endogenous borrowing constraints and frictionless international financial markets can account for these stylized facts that are related to international risk sharing. When preferences are non-separable between consumption and leisure, the borrowing mechanism brings about an internal labor wedge that interacts with the efficient international allocation. This labor wedge is also fundamental to explain the Backus-Smith puzzle or consumption—real-exchange-rate anomaly. Technology shocks contribute to explain international co-movements, whereas country-specific financial shocks to borrowing capacity allow the model to replicate the lack of international risk sharing. When the model is augmented with an additional sector, real estate, international co-movements are matched more closely. |
| Keywords: | international risk sharing, real estate dynamics, borrowing constraints, labor wedge, financial shocks |
| JEL: | E44 F34 F44 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:13-02&r=opm |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? Second, what can explain the difference relative to previous recessions, where we witnessed far weaker co-movement? To address these questions, we develop a two-country model that allows for self-fulfilling business cycle panics. We show that a business cycle panic will necessarily be synchronized across countries as long as there is a minimum level of economic integration. Moreover, we show that several factors generated particular vulnerability to such a global panic in 2008: tight credit, the zero lower bound, unresponsive fiscal policy and increased economic integration. |
| JEL: | E32 F40 F41 F44 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19062&r=opm |
| By: | Marcel Fratzscher; Daniel Schneider; Ine Van Robays |
| Abstract: | This paper takes a financial market perspective in examining the relationship between oil prices, the US dollar and asset prices, and it exploits the heteroskedasticity for the identification of causality in a multifactor model. It finds a bidirectional causality between the US dollar and oil prices since the early 2000s. Moreover, both oil prices and the US dollar are significantly affected by changes in equity market returns and risk. By contrast, oil prices did not react to changes in these financial assets before 2001. The paper provides evidence that this may be explained by the increased use of oil as a financial asset over the past decade, which intensified the link between oil and other assets. The model can account well for the strong and rising negative correlation between oil prices and the US dollar since the early 2000s, with risk shocks and the financialisation process of oil prices explaining most of the strengthening of this correlation. |
| Keywords: | oil prices, asset prices, exchange rates, US dollar, identification, time-varying correlation |
| JEL: | F30 G15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1302&r=opm |
| By: | Enrique G. Mendoza; Katherine A. Smith |
| Abstract: | We study the short- and long-run effects of financial integration in emerging economies using a two-sector model with a collateral constraint on external debt and trading costs incurred by foreign investors. The probability of a financial crisis displays overshooting: It rises sharply initially and then falls sharply but remains positive in the long run. While equity holdings fall permanently, bond holdings initially fall but rise after the crisis probability peaks. Conversely, asset returns and asset prices first rise and then fall. These results are in line with the post-globalization dynamics observed in emerging markets, and the higher frequency of crises they displayed. Without financial frictions, the model yields a negligible fall in equity and a large increase in debt. The results also depend critically on supply-side effects of financial frictions affecting the price of nontradables and dividends from nontradables producers, and on strong precautionary savings incentives induced by the risk of financial crises. |
| JEL: | D52 E44 F32 F41 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19072&r=opm |
| By: | Aizenman, Joshua; Noy, Ilan |
| Abstract: | The global crisis of 2008-9 and the ongoing Euro crisis raise many questions regarding the long-term response to crises. We know that households that lost access to credit, for example, were forced to adjust and increase saving. But, will households remain bigger savers than they would have been had the global financial crisis not occurred? And for how long will this increased saving persist? We also ask similar questions about the public sector’s saving decisions. We study the degree to which past income crises increase the saving rates of affected households and the public sector. We find evidence consistent with history-dependent dynamics: more experience of past crises tends to increase savings among households, but lead to decreased public sector saving. This decrease in public saving, however, is about 1/3 in magnitude than the corresponding increase in private/household saving. We follow up on these findings with an investigation of the importance of historical exposure for current account dynamics, but find no strong indication that our measure of past exposure is important to the current account’s determination. We conclude by examining the likely impact of the 2008-9 GFC on future saving. |
| Keywords: | Saving, household saving, government saving, shocks, rare disasters, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:2776&r=opm |
| By: | Aikaterini Karadimitropoulou (University of East Anglia); Miguel León-Ledesma (University of Kent) |
| Abstract: | Do sector-specific factors common to all countries play an important role in explaining business cycle co-movement? We address this question by analyzing international co-movements of value added (VA) growth in a multi-sector dynamic factor model. The model contains a world factor, country-specific factors, sector-specific factors, and idiosyncratic components. We estimate the model using Bayesian methods for 30 disaggregated sectors in the G7 economies for the 1974-2004 period. Our findings show that, although there is a substantial role for sector-specific factors, fluctuations are dominated by country-factors. The world factor appears to play a minimal role because, when using aggregate data, the world factor captures both the factor common to all countries and industries and the factor common to the same industry across countries. We then examine how these factors evolved as globalization deepened over the past two decades. Our results suggest that business cycles at a disaggregate level have not become more synchronized internationally. This is mainly driven by a substantial fall in the volatility of world shocks during the globalization period, rather than a lower sensitivity of sectoral growth to world factors. Our results also reveal that world factors appear to be more important for industries with a higher level of international vertical integration. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2012_45&r=opm |
| By: | Khan, Muhammad; Kebewar, Mazen; Nenovsky, Nikolay |
| Abstract: | In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties. -- |
| Keywords: | Inflation,Inflation uncertainty,Real uncertainty,Monetary regimes,Eastern Europe |
| JEL: | C22 C51 C52 E0 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:73689&r=opm |
| By: | DREZE, Jacques (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); DURRE, Alain (IESEG-School of Management (Lille Catholic University) and LEM-CNRS) |
| Abstract: | With the current sovereign debt crisis, the incompleteness of economic integration in the Economic and Monetary Union (EMU) has become patent leading to an intense debate among academics and policy makers. Most of the debate focuses on the needs to strengthen fiscal rules and to restore fiscal imbalances through austerity measures which weigh on growth prospects. In this paper we analyse current economic developments within the euro area through the lens of general equilibrium theory. We address two issues (international sharing of macroeconomics risks and coordinated growth stimulation) which are essential to guarantee the sustainability of the EMU. More specifically, we propose mechanisms to cope with intergenerational and interregional risks while focusing on (fiscally neutral) investments meeting social needs and apt to break the vicious circle between fiscal imbalances and stagnation. |
| Keywords: | pgeneral equilibrium model, risk sharing, growth stimulation, fiscal integration, EMU, indexed bonds |
| JEL: | E24 E63 H63 |
| Date: | 2013–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2013013&r=opm |
| By: | Niels Gilbert; Jeroen Hessel; Silvie Verkaart |
| Abstract: | This paper investigates the role that Eurobonds could play in making EMU stable in the long run. We establish that EMU’s budgetary problems are not only caused by lack of budgetary discipline, but also by the large and sudden fiscal deterioration during the financial crisis. This type of shock can never be fully ruled out. EMU member states appear more vulnerable in this situation than countries with their own currency, and risk getting caught in a self-fulfilling spiral of increasing interest rates. This presents a strong case for some type of rescue mechanism. We establish that neither the EFSF/ ESM nor the ECB form the ideal backstop, and that Eurobonds potentially offer a more stable solution, but at the price of important moral hazard problems. All existing Eurobond proposals therefore seek a balance between stabilisation and moral hazard, typically through retaining some degree of market discipline. Our Eurobond proposal improves the trade-off between stabilisation and moral hazard by using Eurobonds themselves to further enforce budgetary discipline. Even then, however, EMU governance has to be strengthened substantially and debt levels have to converge before Eurobonds can be introduced. Therefore, our Eurobond proposal could only serve as the capstone of EMU. |
| Keywords: | Eurobonds; sovereign bond spreads; fiscal risk-sharing; Economic and Monetary Union |
| JEL: | E44 E61 H63 H77 F33 F36 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:379&r=opm |