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on Open Economy Macroeconomic |
| By: | Robert Kollmann (ECARES, Université Libre de Bruxelles a) |
| Abstract: | This paper takes a two-country model with a global bank to US and Euro Area (EA) data. The estimation results (based on Bayesian methods) suggest that global banking strengthens the positive international transmission of real economic disturbances. Shocks that originate in the banking sector account for roughly 20% of the forecast error variance of investment, and about 5% of the forecast variance of US and EA GDP. Bank shocks explain 5%-20% of the fall in US and EA real activity, during the Great Recession. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:840&r=opm |
| By: | Franziska Bremus; Claudia Buch; Katheryn Russ; Monika Schnitzer |
| Abstract: | Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product. |
| JEL: | E32 E44 F4 G0 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19093&r=opm |
| By: | Philip R. Lane |
| Abstract: | We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area. |
| JEL: | E42 F32 F41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0497&r=opm |
| By: | Viktoria Hnatkovska (University of British Columbia); Roc Armenter (Federal Reserve Bank of Philadelphia) |
| Abstract: | The U.S. non-financial corporate sector became a net lender vis-a-vis the rest of the economy in the early 2000s. We document this fact in the aggregate and firm-level data. We then develop a structural dynamic model with investment to study the firms' financing decisions. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend distributions to shareholders when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the large fraction of firms with net savings observed in the period 2000-2007. We also find that the rise in corporate savings over the past 40 years can be mostly attributed to a fall in the cost of equity relative to debt, driven by lower dividend taxes. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:803&r=opm |
| By: | Ben Cheikh, Nidhaleddine |
| Abstract: | This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements. |
| Keywords: | Exchange Rate Pass-Through, Inflation, Sovereign spreads, Smooth Transition Regression |
| JEL: | C22 E31 F31 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47308&r=opm |
| By: | Virgiliu Midrigan (New York University); Joe Kaboski (University of Notre Dame); George Alessandria (Federal Reserve Bank of Philadelphia) |
| Abstract: | The large, persistent fluctuations in international trade that can not be explained in standard models by either changes in expenditures or relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. We find that modelling trade in this way alters the international transmission of business cycles. Specifically, real net exports become less procyclical and consumption becomes less correlated across countries. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:762&r=opm |
| By: | Daniel Gros; Cinzia Alcidi |
| Abstract: | A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete. |
| JEL: | E20 F32 F36 H60 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0492&r=opm |
| By: | Andreas Stathopoulos (University of Southern California); Andrea Vedolin (London School of Economics); Philippe Mueller (London School of Economics) |
| Abstract: | Foreign exchange correlation is a key driver of risk premia in the cross-section of carry trade returns. First, we show that the correlation risk premium, defined as the difference between the risk-neutral and objective measure correlation is large (15% per year) and highly time-varying. Second, sorting currencies according to their exposure with correlation innovations yields portfolios with attractive risk and return characteristics. We also find that high (low) interest rate currencies have negative (positive) loadings on the correlation risk factor. To address our empirical findings, we consider a multi-country general equilibrium model with time-varying risk aversion generated by external habit preferences. In the model, currency risk premia mostly compensate for exposure to global risk aversion, defined as a weighted average of country risk aversions. Given countercyclical real interest rates, the model can also address the forward premium puzzle, as high interest rate currencies are exposed to (while low interest rate currencies provide a hedge to) global risk aversion risk. We also show that high global risk aversion is associated with high conditional exchange rate variance and covariance, providing theoretical justification for sorting currencies on their exposure to fluctuations of exchange rate conditional second moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:818&r=opm |
| By: | Nikolai Roussanov (Wharton School, U. of Penn); Robert Ready (University of Rochester) |
| Abstract: | Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. We relate these differences to the differences of economic fundamentals across countries. We show that countries that primarily export basic commodities exhibit systematically high (real) interest rates while countries that specialize in exporting finished consumption goods typically have lower rates. The resulting interest rate differentials do not fully translate into the depreciation of the commodity currencies, on average. Instead, they translate into expected returns that capture the bulk of the unconditional risk premia that can be obtained in the currency markets. We provide a general equilibrium model of commodity trade and currency pricing that can rationalize these facts by relying on adjustment costs in the shipping sector. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:817&r=opm |
| By: | William R. Cline (Peterson Institute for International Economics) |
| Abstract: | In this semiannual update, William R. Cline presents new estimates of fundamental equilibrium exchange rates (FEERs). Once again it is found that the key cases of the United States and China involve only modest over- and undervaluation, respectively. However, the Japanese yen is found to have fallen substantially below its FEER as a consequence of the aggressive quantitative easing policy, and Cline suggests that if the currency continues much further along a downward path, the G-7 may need to consider joint intervention to curb its decline. The study concludes by adding a variant of the calculations in which rich countries are set a floor target of at least a zero current account balance, and emerging market economies are set a ceiling target of zero balance. In this "aggressive rebalancing" in which capital would no longer flow "uphill" from poor to rich countries, the US dollar would require a much larger depreciation and the Chinese renminbi a much larger appreciation. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-15&r=opm |
| By: | Giuseppe Bertola |
| Abstract: | If economic integration fosters expectations of institutional and productivity convergence, then international capital flows should be driven by consumption-smoothing anticipation of future income growth patterns as well as by factor-intensity equalization. In the euro area, financial market integration eased accumulation of international imbalances but does not appear to have resulted in the expected institutional convergence. The resulting crisis casts doubt on the sustainability not only of international imbalances, but also of the current configuration of the European integration process. A robust and coherent European market and policy integration process would require supranational implementation of the behavioral constraints and contingent redistribution schemes that traditionally operate within National socio-economic systems, and have been weakened in recent experience by uncoordinated policy competition. |
| JEL: | E63 F36 F21 F42 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0490&r=opm |
| By: | Adam Reiff (National Bank of Hungary); Attila Ratfai (Central European University) |
| Abstract: | We argue that the underlying width of the border in international price determination is a trivial fraction of the corresponding Engel and Rogers (1996) reduced form estimate. We develop a two-country, multi-region, dynamic, stochastic equilibrium model of monopolistic competition with costly price adjustment and cross-location shopping. The optimal price is proportional to a weighted average of market prices, with weights negatively related to shopping costs. We calibrate structural distance and border parameters to a unique panel of store-level prices, and conclude that price adjustment costs directly account for about a quarter of the reduced form border width. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:799&r=opm |
| By: | Tim Robinson (Reserve Bank of Australia) |
| Abstract: | Different approaches to modelling the macroeconomy vary in the emphasis they place on coherence with theory relative to their ability to match the data. Dynamic stochastic general equilibrium (DSGE) models place greater emphasis on theory, while vector autoregression (VAR) models tend to provide a better fit of the data. Del Negro and Schorfheide (2004) develop a method of using a DSGE model to inform the priors of a Bayesian VAR. The resulting BVAR-DSGE model partially relaxes the relationships in the DSGE so as to fit the data better. However, their approach does not accommodate the typical restriction of small open economy models which ensures that developments in the small economy cannot affect the large economy. I develop a method that allows this restriction to be imposed and introduce a simple way, suitable for small open economies, of identifying the empirical BVAR-DSGE using information from the DSGE model. These methods are demonstrated using the Justiniano and Preston (2010a) DSGE model. Compared to the DSGE model, the empirical BVAR-DSGE model estimates that there is a larger role for foreign shocks in the small economy's business cycle. |
| Keywords: | BVAR-DSGE; small open economy |
| JEL: | C11 C32 C51 E30 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2013-06&r=opm |
| By: | Niccolò Battistini; Marco Pagano; Saverio Simonelli |
| Abstract: | According to conventional indicators, the euro-area financial integration has receded since 2007, mainly in the money market, sovereign debt market and uncollateralized credit markets. But price-based measures of debt market segmentation are inappropriate when solvency risk differs across countries: only the component of yield differentials that is not a reward for the issuer’s credit risk may reflect segmentation. We apply this idea to the euro sovereign debt market, using a dynamic factor model to decompose yield differentials in a country-specific and a common (or systemic) risk component. As the country-specific component dominates, purging yields from it produces much smaller measures of bond market segmentation than conventional ones for the crisis period. We also investigate how the home bias of banks’ sovereign portfolios – a quantity-based measure of segmentation – is related to yield differentials, by estimating a vector error-correction model on 2008-12 monthly data. We find that the sovereign exposures of banks in most euro-area countries respond positively to increases in yields, especially in periphery countries. When yield differentials are decomposed in their country-risk and common-risk components, we find that: (i) in the periphery, banks respond to increases in country risk by increasing their domestic exposure, while in core countries they do not; (ii) in contrast, in most euro-area countries banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (i) hints at distorted incentives in periphery banks’ response to changes in their own sovereign’s risk. Finding (ii) indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the euro-area sovereign market more segmented. |
| JEL: | C32 C51 C58 G11 G15 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0494&r=opm |