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on Open Economy Macroeconomic |
| By: | Michael B. Devereux; Viktoria V. Hnatkovska |
| Abstract: | Models of risk-sharing predict that relative consumption growth rates across locations should be positively related to real exchange rate growth rates across the same areas. We investigate this hypothesis using a new multi-country and multi-regional data set. Within countries, we find evidence for risk-sharing: episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation. Across countries however, the association is reversed: relative consumption and real exchange rates are negatively correlated. We define this reversal as a border effect and show that it accounts for 53 percent of the deviations from full risk-sharing. Since crossborder real exchange rates involve different currencies, it is natural to ask how much of the border effect is accounted for by movements in exchange rates? We find that over one-third of the border effect is due to nominal exchange rate fluctuations. We develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross-country risk-sharing. |
| Keywords: | Real exchange rate, risk sharing, border effect, intranational economics |
| JEL: | F3 F4 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-37&r=opm |
| By: | Gunes Kamber; Christoph Thoenissen |
| Abstract: | This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-39&r=opm |
| By: | Hyeongwoo Kim; Ippei Fujiwara; Bruce E. Hansen; Masao Ogaki |
| Abstract: | It is well-known that there is a large degree of uncertainty around Rogoff's (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods. |
| Keywords: | Purchasing Power Parity; Taylor Rule; Half-Life of PPP Deviations; Median Unbiased Estimator; Grid-t Confidence Interval |
| JEL: | C32 E52 F31 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-41&r=opm |
| By: | Joshua Aizenman; Gurnain Pasricha |
| Abstract: | In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in recent decades. Liberalization of capital outflow controls can allow emerging-market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000s compared with the 1980s. In line with this decline in external repression revenues and their growth accelerations in the 2000s, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Overheating and foreign exchange valuation concerns arising from NKI pressures were important, but so were financial stability concerns and concerns about macroeconomic volatility. Emerging markets facing high volatility in net capital inflows and higher short-term balance-sheet exposures liberalized outflows less. Countries eased outflows more in response to higher appreciation pressures in the exchange market, stock market appreciation, real exchange rate volatility, net capital inflows and accumulation of reserves. |
| Keywords: | Debt Management; Financial system regulation and policies; International topics; Recent economic and financial developments |
| JEL: | E43 E52 E58 C22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-21&r=opm |
| By: | M. Fatih Ekinci |
| Abstract: | We present and study the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. We find that introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, we can address the exchange rate volatility for reasonable values of risk aversion. We observe more persistence in output, consumption and employment which brings us closer to the data. Impulse responses to monetary shocks are hump shaped, consistent with the empirical evidence. Forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate. However, we find that decline in the correlation is quantitatively small. |
| Keywords: | Sticky Information, Exchange Rate Volatility |
| JEL: | F31 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1325&r=opm |
| By: | Jean-Pierre Allegret; Cécile Couharde; Dramane Coulibaly; Valérie Mignon |
| Abstract: | Oil-exporting countries usually experience large current account improvements following a sharp increase in oil prices. In this paper, we investigate this oil price-current account relationship on a sample of 27 oil-exporting economies. Relying upon the estimation of panel smooth transition regression models over the 1980-2010 period, we provide evidence that refines the traditional interpretation of oil price effects on current accounts. While current accounts are positively affected by oil price variations, this effect is nonlinear and depends critically on the degree of financial development of oil-exporting economies. More specifically, oil price variations exert a positive impact on the current account position for less financial developed countries, while this influence tends to diminish when the degree of financial deepness augments. |
| Keywords: | Current account;oil price;financial development;panel smooth transition;regression models |
| JEL: | F32 C33 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2013-19&r=opm |
| By: | Fernando Broner; Aitor Erce; Alberto Martín; Jaume Ventura |
| Abstract: | In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by …financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level. |
| Keywords: | sovereign debt, rollover crises, secondary markets, economic growth |
| JEL: | F32 F34 F36 F41 F43 F44 G15 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:701&r=opm |
| By: | Feldkircher, Martin (BOFIT); Horvath, Roman (BOFIT); Rusnak, Marek (BOFIT) |
| Abstract: | In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the global financial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-infation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures. |
| Keywords: | exchange market pressures; financial crisis |
| JEL: | F31 F37 |
| Date: | 2013–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_011&r=opm |
| By: | Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University) |
| Abstract: | What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the \news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy. |
| Keywords: | expectations-driven business cycles, sovereign defaults; financial intermediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements. |
| JEL: | E3 E44 F36 F37 F4 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:13-03&r=opm |
| By: | Daan Steenkamp (Reserve Bank of New Zealand) |
| Abstract: | The Balassa-Samuelson hypothesis suggests that countries with a weak relative productivity performance should, over time, see a low or falling real exchange rate. This note uses detailed sectoral data to test the hypothesis over the period 1978-2006 and also fails to find any evidence of the expected effect. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2013/01&r=opm |
| By: | François Geerolf; Thomas Grjebine |
| Abstract: | We study the causal link between house prices and current accounts. Across time and countries, we find a very large and significant impact of house prices on current accounts. In order to rule out endogeneity concerns, we instrument house prices for a panel of countries, using property tax variations. A 10% instrumented appreciation in house prices leads to a deterioration in the current account of 1.7% of GDP. These results are very robust to the inclusion of the determinants of current accounts. Following a house price increase, private savings decrease, through wealth effects rather than consumer-finance based mechanisms, while non-residential investment rises through a relaxation of financing constraints for firms. |
| Keywords: | Current accounts |
| JEL: | F32 F36 F40 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2013-18&r=opm |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | We introduce “financial imperfections” - asymmetric net wealth positions, incomplete risksharing, and interest rate spread across member countries - in a prototypical two-country currency union model and study implications for monetary policy transmission mechanism and optimal policy. In addition to, and independent from, the standard transmission mechanism associated with nominal rigidities, financial imperfections introduce a wealth redistribution role for monetary policy. Moreover, the two mechanisms reinforce each other and amplify the effects of monetary policy. On the normative side, financial imperfections, via interactions with nominal rigidities, generate two novel policy trade-offs. First, the central bank needs to pay attention to distributional efficiency in addition to macroeconomic (and price level) stability, which implies that a strict inflation targeting policy of setting union-wide inflation to zero is never optimal. Second, the interactions lead to a trade-off in stabilizing relative consumption versus the relative price gap (the deviation of relative prices from their efficient level) across countries, which implies that the central bank allows for less flexibility in relative prices. Finally, we consider how the central bank should respond to a financial shock that causes an increase in the interest rate spread. Under optimal policy, the central bank strongly decreases the deposit rate, which reduces aggregate and distributional inefficiencies by mitigating the drop in output and inflation and the rise in relative consumption and prices. Such a policy response can be well approximated by a spreadadjusted Taylor rule as it helps the real interest rate track the efficient rate of interest. |
| Keywords: | Price levels ; Money supply |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:150&r=opm |
| By: | Alexander Popov; Neeltje van Horen |
| Abstract: | Using loan-level data, we find that syndicated lending by European banks with sizeable balance sheet exposures to impaired sovereign debt was negatively affected after the start of the euro area sovereign debt crisis. We also observe a reallocation away from foreign (especially US) markets. The overall reduction in lending is not driven by changes in borrower demand and/or quality, or by other types of shocks to bank balance sheets. The slowdown in lending is lower for banks that reduced their debt holdings in the later stages programs. |
| Keywords: | Sovereign debt; bank lending; international transmission |
| JEL: | E44 F34 G21 H63 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:382&r=opm |