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on Open Economy Macroeconomic |
| By: | David Cook; Michael B. Devereux |
| Abstract: | Open economy macro theory says that when a country is subject to idiosyncratic macro shocks, it should have its own currency and a flexible exchange rate. But recently in many countries policy rates have been pushed down close to the lower bound, limiting the ability of policy-makers to accommodate shocks, even in open economies with flexible exchange rates. In this paper, we show that if the zero bound constraint is binding and policy lacks an effective `forward guidance' mechanism, a flexible exchange rate system may be inferior to a single currency area, even when there are country-specific macro shocks. When monetary policy is constrained by the zero bound, under independent currencies with flexible exchange rates, the exchange rate exacerbates the impact of shocks. Remarkably, this may hold true even if only a subset of countries are constrained by the zero bound, and other countries freely adjust their interest rates. In order for a regime of multiple currencies to dominate a single currency area in a liquidity trap environment, it is necessary to have effective forward guidance in monetary policy. |
| JEL: | F3 F33 F4 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19588&r=opm |
| By: | Zheng Liu; Mark M. Spiegel |
| Abstract: | The recent financial crisis has led to large declines in world interest rates and surges of capital flows to emerging market economies. We examine the effectiveness and welfare implications of capital control policies in the face of such external shocks in a monetary DSGE model of a small open economy. We consider both optimal, time-varying restrictions on capital inflows and a simple capital account restriction, such as a constant tax on foreign debt holdings. We then compare the effectiveness of such capital account restrictions under alternative monetary regimes. We find that the optimal time-varying capital control policy is very effective in mitigating foreign interest rate shocks, but less effective for insulating the economy from export demand shocks; in the presence of export demand shocks, an exchange-rate stabilizing monetary policy regime can enhance macroeconomic stability and improve welfare. Under a simple and more practical capital control policy, a monetary policy regime that places larger weight on inflation fluctuations leads to additional gains in macroeconomic stability, although an exchange-rate stabilizing regime leads to even greater gains. Our findings suggest that, with either type of capital control policies, stabilizing the real exchange rate is a robust and effective monetary policy to help weather external shocks. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-33&r=opm |
| By: | Peter Fuleky (UHERO and Department of Economics, University of Hawaii at Manoa); L Ventura (Department of Economics and Law, Sapienza, University of Rome); Qianxue Zhao (Department of Economics, University of Hawaii at Manoa) |
| Abstract: | Existing studies of risk pooling among groups of countries are predicated upon the highly restrictive assumption that all countries have symmetric responses to aggregate shocks. We show that the conventional risk sharing test fails to isolate idiosyncratic fluctuations within countries and produces spurious results. To avoid these problems, we propose an alternative form of the risk sharing test that is robust to heterogeneous country characteristics. In our empirical example, we provide estimates using the pro- posed approach for various groupings of 158 countries. |
| Keywords: | Panel data, Cross-sectional dependence, International risk sharing, Consumption insurance |
| JEL: | C23 C51 E21 F36 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201315&r=opm |
| By: | Stefano Bosi (EPEE, University of Evry); Patrice Fontaine (Euro?dai, CERAG, University Pierre-Mendes-France, Grenoble); Cuong Le Van (CNRS, Hanoi WRU, VCREME) |
| Abstract: | The international asset pricing models are mostly developed in the case of parity failure (investors of di?erent countries do not agree on the expected returns on securities). In this case, an equilibrium in the international asset markets may exist, but not in the international good markets. In our paper, we prove the existence of an equilibrium in both the asset and the good markets. We focus also on the links between parities, no-arbitrage conditions and the general equilibrium. We show that no-arbitrage conditions for international asset and good markets are necessary and sufficient to an equilibrium in both the markets. |
| Keywords: | International asset pricing, Returns on securities, Exchange rates, No-arbitrage conditions, PPP, UIRP, General equilibrium |
| JEL: | D53 F31 G11 G15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1613&r=opm |
| By: | Christopher F. Baum; Margarita Karpava; Dorothea Schäfer; Andreas Schäfer |
| Abstract: | This paper studies the impact of credit rating agency (CRA) announcements on the value of the Euro and the yields of French, Italian, German and Spanish long-term sovereign bonds during the culmination of the Eurozone debt crisis in 2011-2012. The employed GARCH models show that CRA downgrade announcements negatively affected the value of the Euro currency and also increased its volatility. Downgrading increased the yields of French, Italian and Spanish bonds but lowered the German bond's yields, although Germany's rating status was never touched by CRA. There is no evidence for Granger causality from bond yields to rating announcements. We infer from these findings that CRA announcements significantly influenced crisis-time capital allocation in the Eurozone. Their downgradings caused investors to rebalance their portfolios across member countries, out of ailing states' debt into more stable borrowers' securities. |
| Keywords: | : Credit Rating Agencies, Euro Crisis, Sovereign Debt, Euro Exchange Rate |
| JEL: | G24 G01 G12 G14 E42 E43 E44 F31 F42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1333&r=opm |
| By: | Nidhaleddine Ben Cheikh (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie) |
| Abstract: | This paper analyzes the exchange rate pass-through (ERPT) into consumer prices for 12 EA countries within a CVAR framework. Using the Johansen cointegration procedure, results indicate the existence of one cointegrating vectors at least for each EA country of our sample. When measuring the long-run effect of exchange rate changes on consumer prices, we found a wide dispersion of ERPT elasticities, especially between "peripheral" and "core EA" economies. For instance, consumer prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. Besides, the loading factors point out a very slow adjustment of consumer prices towards their long-run equilibrium across EA countries. This would explain the weakness of ERPT estimates in the short-run. |
| Keywords: | Exchange Rate Pass-Through; Inflation; Cointegration |
| Date: | 2013–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00879270&r=opm |
| By: | Carmen Broto (Banco de España); Gabriel Perez-Quiros (Banco de España) |
| Abstract: | During the last crisis, developed economies’ sovereign Credit Default Swap (hereafter CDS) premia have gained in importance as a tool for approximating credit risk. In this paper, we fit a dynamic factor model to decompose the sovereign CDS spreads of ten OECD economies into three components: a common factor, a second factor driven by European peripheral countries and an idiosyncratic component. We use this decomposition to propose a novel methodology based on the real-time estimates of the model to characterize contagion among the ten series. Our procedure allows the country that triggers contagion in each period, which can be any peripheral economy, to be disentangled. According to our findings, since the onset of the sovereign debt crisis, contagion has played a non-negligible role in the European peripheral countries, which confirms the existence of signifi cant financial linkages between these economies. |
| Keywords: | sovereign Credit Default Swaps, contagion, dynamic factor models, credit risk |
| JEL: | C32 G01 G15 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1314&r=opm |
| By: | Dumitriu, Ramona; Stefanescu, Răzvan |
| Abstract: | After the fall of communist regime the Romanian current account passed from exceeds to substantial and persistent deficits. This evolution raised concerns over the country external sustainability. Since 2007, in the Romanian foreign trade dramatic changes occurred, being induced by the adhesion to European Union and by the global crisis. The adhesion to European Union stimulated both exports and imports. However, because the exports growth was much less consistent than the imports growth, the deficits of current account widened. Beginning with the end of 2008, the national economy was affected by the global crisis which discouraged both exports and imports. This time, because the decline of exports was less sharp than the decline of imports, the deficits of the Romanian current account narrowed. However, the country external sustainability is still an actual problem in the circumstances of the new challenges of a changing international context. In this paper we investigate the sustainability of the Romanian current account from January 2007 to January 2013. In our analysis we employ monthly values of the main components of the current account. We also use unit root and cointegration tests that allow taking into consideration the structural breaks. Our results suggest the deficits of the current account are not sustainable. |
| Keywords: | Romanian Current Account, Sustainability, Adhesion to European Union |
| JEL: | F10 F15 F40 |
| Date: | 2013–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51244&r=opm |