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on Open Economy Macroeconomic |
| By: | Carmen Reinhart; Kenneth Rogoff |
| Abstract: | Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial Repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs. |
| Keywords: | Financial crisis;Sovereign debt;Debt conversion;Debt restructuring;External debt;Public debt;Inflation;Economic growth;Developed countries;Emerging markets;Financial crises, sovereign debt crises, deleveraging, credit cycles, financial repression, debt restructuring |
| Date: | 2013–12–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/266&r=opm |
| By: | Jordi Galí; Tommaso Monacelli |
| Abstract: | We study the gains from increased wage flexibility and their dependence on exchange rate policy, using a small open economy model with staggered price and wage setting. Two results stand out: (i) the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate, and (ii) an increase in wage flexibility often reduces welfare, and more likely so in economies under an exchange rate peg or an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union. |
| Keywords: | sticky wages, nominal rigidities, New Keynesian model, stabilization policies, exchange rate policy, currency unions, monetary policy rules |
| JEL: | E32 E52 F41 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:746&r=opm |
| By: | Gunes Kamber; Konstantinos Theodoridis; Christoph Thoenissen |
| Abstract: | The focus of this paper is on expectations driven business cycles in small open economies. We make two significant contributions. First, we identify news shocks for a set advanced small open economies using the methodology of Beaudry et al. (2011). We find, in line with the previous VAR evidence for the US economy that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Second, we develop a small open economy model with financial frictions, along the lines of Jermann and Quadrini (2012) that is able to replicate the positive co-movements identified in the data. |
| Keywords: | News shocks, business cycles, open economy macroeconomics, financial frictions, VAR |
| JEL: | E32 F4 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-02&r=opm |
| By: | Michael Kumhof; Romain Ranciere; Pablo Winant |
| Abstract: | The paper studies how high household leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises arise endogenously in response to a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades prior to the Great Recession. |
| Keywords: | Income distribution;Private sector;Credit demand;Debt;Financial crisis;Income inequality; wealth inequality; debt leverage; financial crises; wealth in utility; global solution methods. |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/249&r=opm |
| By: | Alan Taylor |
| Abstract: | Consider two views of the global financial crisis. One view looks across the border: it blames external imbalances, the unprecedented current account deficits and surpluses in recent years. Another view looks within the border: it faults domestic financial systems where risks originated in excessive credit booms. We can use the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. The credit boom explanation is the most plausible predictor of crises since the late nineteenth century; global imbalances have only a weak correlation with financial distress compared to indicators drawn from the financial system itself. |
| Keywords: | Financial crisis;Current account;Credit expansion;Capital flows;Business cycles;Financial crises, financial openness, capital controls, current account, external imbalances |
| Date: | 2013–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/260&r=opm |
| By: | Matthieu Bussière; Gong Cheng; Menzie D. Chinn; Noëmie Lisack |
| Abstract: | Based on a dataset of 112 emerging economies and developing countries, this paper addresses two key questions regarding the accumulation of international reserves: first, has the accumulation of reserves effectively protected countries during the 2008-09 financial crisis? And second, what explains the pattern of reserve accumulation observed during and after the crisis? More specifically, the paper investigates the relation between international reserves and the existence of capital controls. We find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly if associated with a less open capital account. In the immediate aftermath of the crisis, countries that depleted foreign reserves during the crisis quickly rebuilt their stocks. This rapid rebuilding has, however, been followed by a deceleration in the pace of accumulation. The timing of this deceleration roughly coincides with the point when reserves reached their pre-crisis level and may be related to the fact that short-term debt accumulation has also decelerated in most countries over this period. |
| JEL: | F31 G01 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19791&r=opm |
| By: | Lorenzo Forni; Massimiliano Pisani |
| Abstract: | We assess the macroeconomic effects of a sovereign restructuring in a small economy belonging to a monetary union by simulating a dynamic general equilibrium model. In line with the empirical evidence, we make the following three key assumptions. First, sovereign debt is held by domestic agents and by agents in the rest of the monetary union. Second, after the restructuring the sovereign borrowing rate increases and its increase is fully transmitted to the borrowing rate paid by the domestic agents. Third, the government cannot discriminate between domestic and foreign agents when restructuring. We show that the macroeconomic effects of the restructuring depend on: (a) the share of sovereign bonds held by residents in the country as compared to that held by foreign residents, (b) the increase in the spread paid by domestic agents and (c) its net foreign asset position at the moment of the restructuring. Our results also suggest that the sovereign restructuring implies persistent reductions of output, consumption and investment, that can be large, in particular if the share of public debt held domestically is large, the private foreign debt is high and the spread paid by the government and the households does increase. |
| Keywords: | Sovereign debt;Monetary unions;Public debt;Debt restructuring;Fiscal consolidation;Fiscal policy;Economic models;Fiscal policy, DSGE modeling, sovereign restructuring |
| Date: | 2013–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/269&r=opm |
| By: | Magali Dauvin (EconomiX-CNRS, University Paris West Nanterre-la Défense, France) |
| Abstract: | This paper investigates the relationship between energy prices and the real effective exchange rate of commodity-exporting countries. We consider two sets of countries: 10 energy-exporting and 23 non-fuel commodity-exporting countries over the period 1980-2011. Estimating a panel cointegrating relationship between the real exchange rate and its fundamentals, we provide evidence for the existence of "energy currencies". Relying on the estimation of panel smooth transition regression (PSTR) models, we show that there exists a certain threshold beyond which the real effective exchange rate of both energy and commodity exporters reacts to oil prices, through the terms-of-trade. More specifically, when oil price variations are low, the real effective exchange rates are not determined by terms-of-trade but by other usual fundamentals Nevertheless, when the oil market is highly volatile, currencies follow an "oil currency" regime, terms-of-trade becoming an important driver of the real exchange rate. |
| Keywords: | Energy Prices, Terms-of-Trade, Exchange Rate, Commodity-Exporting Countries, Panel Cointegration, Nonlinear Model, PSTR |
| JEL: | C33 F31 Q43 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.102&r=opm |
| By: | Fernando Broner; Aitor Erce; Alberto Martin; 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;Europe;Spillovers;Financial crisis;Bond issues;Investment;Economic models;sovereign debt, rollover crises, secondary markets, economic growth |
| Date: | 2013–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/270&r=opm |
| By: | Laura Jaramillo; Anke Weber |
| Abstract: | While fiscal conditions remain healthier than in advanced economies, emerging economies continue to be exposed to negative spillovers if global conditions were to become less favorable. This paper finds that domestic bond yields in emerging economies are heavily influenced by two international factors: global risk appetite and global liquidity. Using a novel approach, the analysis goes on to show that the vulnerability of emerging economies to these factors is not uniform but rather depends on country specific characteristics, namely fiscal fundamentals, financial sector openness and the external current account balance. |
| Keywords: | Spillovers;Bond markets;Emerging markets;Public debt;Bond Markets, Emerging Market Economies, Fiscal Deficit, Public Debt, Global Spillovers |
| Date: | 2013–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/264&r=opm |
| By: | Dennis Bonam; Jasper Lukkezen |
| Abstract: | Keynesian theory predicts output responses upon a fiscal expansion in a small open economy to be larger under fixed than floating exchange rates. We analyse the effects of fiscal expansions using a New Keynesian model and find that the reverse holds in the presence of sovereign default risk. By raising sovereign risk, a fiscal expansion worsens private credit conditions and reduces consumption; these adverse effects are offset by an exchange rate depreciation and a rise in exports under a float, yet not under a peg. We find that output responses can even be negative when exchange rates are held fixed, suggesting the possibility of expansionary fiscal consolidations. |
| Keywords: | Fiscal policy, government spending, exchange rate regime, sovereign risk, New Keynesian model, expansionary fiscal consolidation |
| JEL: | E32 E52 E62 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1401&r=opm |
| By: | Stéphane Auray (CREST-Ensai, Bruz, F-35170, France ; Université du Littoral Côte d’Opale, F-59375 Dunkerque, France ; CIRPEE, Canada); Aurélien Eyquem (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent. |
| Keywords: | Monetary Union, Financial Markets Incompleteness, Sticky Prices, Fiscal and Monetary Policy |
| JEL: | E32 E63 F32 F41 F42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1342&r=opm |
| By: | Mandelman, Federico S. (Federal Reserve Bank of Atlanta) |
| Abstract: | During the last thirty years, labor markets in advanced economies were characterized by their remarkable polarization. As job opportunities in middle-skill occupations disappeared, employment opportunities concentrated in the highest- and lowest-wage occupations. I develop a two-country stochastic growth model that incorporates trade in tasks, rather than in goods, and reveal that this setup can replicate the observed polarization in the United States. This polarization was not a steady process: the relative employment share of each skill group fluctuated significantly over short-to-medium horizons. I show that the domestic and international aggregate shocks estimated within this framework can rationalize such employment dynamics while providing a good fit to the macroeconomic data. The model is estimated with employment data for different skills groups and trade-weighted macroeconomic indicators. |
| Keywords: | labor market polarization; international business cycles; heterogeneous agents; stochastic growth; two-country models |
| JEL: | F16 F41 |
| Date: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-17&r=opm |
| By: | Markus Eberhardt; Andrea Presbitero |
| Abstract: | We study the long-run relationship between public debt and growth in a large panel of countries. Our analysis takes particular note of theoretical arguments and data considerations in modeling the debt-growth relationship as heterogeneous across countries. We investigate the issue of nonlinearities (debt thresholds) in both the cross-country and within-country dimensions, employing novel methods and diagnostics from the time-series literature adapted for use in the panel. We find some support for a nonlinear relationship between debt and long-run growth across countries, but no evidence for common debt thresholds within countries over time. |
| Keywords: | Public debt;Economic growth;Economic models;growth, public debt, common factor model, nonlinearity, asymmetric ARDL |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/248&r=opm |
| By: | Gaulier, G.; Santoni, G.; Taglioni, D.; Zignago, S. |
| Abstract: | Over the past two decades, international trade has become a privileged engine of growth for much of the developing world. In the wake of the global crisis, countries must pay close attention to their positioning on the global map of trade and production and become aware of how they fare relative to competitors and to their past export performance. To which extent changes in their market shares are driven by exporter own supply-side capacity as opposed to external or compositional factors, dues to their product and geographical specialization? This paper uses quarterly data, covering all exchanges flows at the product level since 2005, to compute indicators of export performance stripped of compositional effects. The resulting Export Competitiveness Database (ECD) reveals that emerging and developing regions, particularly the Asia and Pacific one, had strongest capacity to gain market shares in the most recent period, with changes reflecting growth in export volumes rather than price developments (once controlled for the composition effects). In contrast, ECD indicators also trace the legacy of the double-dip recession in the euro area, which have turned into negative the geographical effects of the traditional intra-zone specialization, despite the generally positive effects of sectoral structure. These measures of competitiveness correlate to nominal and real effective exchange rates, factors that are commonly perceived as important determinants of a country’s export competitiveness. |
| Keywords: | export competitiveness, trade performance, shift-share decomposition. |
| JEL: | F10 F14 F40 C43 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:472&r=opm |
| By: | Ayako Saiki; Sunghyun Henry Kim |
| Abstract: | Business cycle synchronization is an important condition for a currency union to be successful. Frankel and Rose (1998) showed empirically that increased trade would have a positive impact on business cycle correlation while acknowledging the theoretical ambiguity on the relationship. Based on their finding, they claimed that the Eurozone’s optimal currency criteria (OCA) can be satisfied ex-post. In this paper, we first investigate whether the Eurozone exhibits more synchronized business cycles since the adoption of the euro. Then, we attempt to link the business cycle synchronization with trade integration. Our new contribution is that we examine the role intra-industry trade (IIT), and vertical IIT (V-IIT), in business cycle synchronization using the data of two sets of countries, Eurozone and East Asia that have been going through distinctively different kinds of economic integration. Our main findings are as follows. First, our empirical results suggest that the business cycle correlation increased over time, in both the Eurozone and East Asia, but synchronization has been progressing much faster in East Asia. Also, with respect to trade, intra-regional trade intensity in various measures has risen in East Asia but fallen in the Eurozone in recent years, perhaps due to the rise of China as an important trade partner for Europe. Second, unlike Frankel and Rose (1998), we find that the impact of increased trade intensity on business cycle correlation is ambiguous. This could be due to the fact that trade among countries with different factor endowment – e.g. countries within East Asia, among the Eurozone’s old and new member states – may dampen the business cycle correlation via increased specialization in different industries that receive different shocks. Instead, IIT, in particular V-IIT, unambiguously increased business cycle correlation in both regions. Vertical IIT increased substantially over the last few decades in East Asia but not in the Eurozone, which is consistent with the rapid increase in business cycle correlation in East Asia. |
| Keywords: | Business cycle synchronization; global integration; intra-industry trade; currency union |
| JEL: | F15 F41 F42 F44 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:407&r=opm |