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on Open Economy Macroeconomic |
| By: | Ippei Fujiwara; Yuki Teranishi |
| Abstract: | Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in its own country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination. |
| Keywords: | Sacrifice Ratio, Time-Varying Parameters |
| JEL: | E50 F41 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-71&r=opm |
| By: | Cristina Arellano; Yan Bai |
| Abstract: | We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders with concave payoffs. A foreign default increases incentives to default at home because it makes new borrowing more expensive and defaulting less costly. Foreign defaults tighten home bond prices because they lower lenders' payoffs. Foreign defaults make home default less costly by lowering future recoveries, because countries can extract more surplus if they renegotiate simultaneously. In our model, the home country may default only because the foreign country is defaulting. This dependency arises during fundamental foreign defaults, where the foreign country defaults because of high debt and low income, and also during self-fulfilling defaults, where both countries default only because the other is defaulting. The simultaneity in defaults induces a correlation in interest rate spreads across countries. The model can rationalize some of the recent economic events in Europe. |
| Keywords: | Europe ; Debt |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:491&r=opm |
| By: | Leo de Haan; Jeroen Hessel; Jan Willem van den End |
| Abstract: | This paper examines the extent to which large swings of sovereign yields in euro area countries during the sovereign debt crisis can be attributed to fundamentals. We focus on the inherent uncertainty in bond yield models, which is often overlooked in the literature. We show that the outcomes are strongly affected by modeling choices with regard to i) the confidence bands for the model prediction, ii) the assumption whether the model coefficients are similar across countries or not, iii) the sample selection, iv) the inclusion of financial variables and v) the choice of time-varying coefficients. These choices affect the explanatory power of macro fundamentals and the extent of mispricing. We find substantial misalignment compared to fundamentals for Greek yields, in most specifications also for Portugal and Ireland, but for the other EMU countries, including Spain and Italy, the evidence is less clear cut. This calls for modesty in interpreting bond yield models and for cautiousness when using them in policymaking. |
| Keywords: | Sovereign bond; Interest rate; Risk premium |
| JEL: | E43 E44 F34 G15 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:399&r=opm |
| By: | Mina Kim (Bureau of Labor Statistics); Deokwoo Nam (City University of Hong Kong); Jian Wang (Federal Reserve Bank of Dallas and Hong Kong Institute for Monetary Research); Jason Wu (Federal Reserve Board) |
| Abstract: | The interaction between the exchange rate regime, trade firms' price-setting behavior, and exchange rate pass-through (ERPT) is an important topic in international economics. This paper studies this using a goods-level dataset of US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China abandoned its hard peg to the US dollar in June 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of Renminbi (RMB) appreciation into US import prices between 2005 and 2008. Goods-level data allows us to estimate that the lifelong ERPT is close to one for goods that have at least one price change, but less than one-half when all goods are included. This finding can be attributed to the fact that around 40% of the goods never experienced a price change, and supports the hypothesis that price changes that take the form of product replacements may bias ERPT estimates downwards. |
| Keywords: | Price Stickiness, Menu Cost Model, International Trade Prices, RMB, Exchange Rate Pass-Through |
| JEL: | E31 F14 F31 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:202013&r=opm |
| By: | Antonio Falato; Dalida Kadyrzhanova; Jae W. Sim |
| Abstract: | This paper explores the hypothesis that the rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades. Using a new measure,we show that intangible capital is the most important firm-level determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together. We then develop a new dynamic model of corporate cash holdings with two types of productive assets, tangible and intangible capital. Since only tangible capital can be pledged as collateral, a shift toward greater reliance on intangible capital shrinks the debt capacity of firms and leads them to optimally hold more cash in order to preserve financial flexibility. In the model, firms with growth options tend to hold more cash in anticipation of (S,s)-type adjustments in physical capital because they want to avoid raising costly external finance. We show that this mechanism is quantitatively important, as our model generates cash holdings that are up to an order of magnitude higher than the standard benchmark and in line with their empirical averages for the last two decades. Overall, our results suggest that technological change has contributed significantly to recent changes in corporate liquidity management. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-67&r=opm |
| By: | Jan in 't Veld |
| Abstract: | A model-based assessment of the macro-economic impact of consolidations and their spillovers in the euro area in 2011-13. This paper uses a structural multi-country model to assess the impact of fiscal consolidation measures undertaken in 2011-13 in the EA periphery and core. The simulations assume 'crisis' conditions prevailing (high share of constrained households, ZLB). The GDP effects depend crucially on the composition of the consolidation and on how quickly expectations are affected. Expenditure-based consolidations have larger impact multipliers than revenue-based consolidations. Average multipliers for domestic fiscal shocks range from 0.5 and 1, depending on the degree of openness. But spillovers of fiscal consolidations are large, with both the demand channel and the competitiveness channel adding to the negative GDP effects. Higher risk premia add further to the negative GDP effects. Spillovers from consolidations in Germany and core EA have worsened the overall economic situation. A temporary fiscal stimulus in surplus countries can boost output and help reduce their current account surpluses. The improvement in current account deficits in the periphery is however small. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0506&r=opm |