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on Open Economy Macroeconomic |
| By: | Mervyn King; David Low |
| Abstract: | Over the past couple of decades, and especially since the financial crisis in 2008-09, real interest rates have collapsed. For much of the past two years they have been negative, but they have been trending down for some while. But how far have real rates fallen? This note computes a measure of the “world” real interest rate and, where possible, a measure of the implied future real rate. It also makes public our estimates of the “world” real interest rate so they can be used by other researchers. |
| JEL: | E4 E43 G12 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19887&r=opm |
| By: | Bertay, A.C. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper investigates the credit supply of banks in response to domestic and foreign real estate price changes. Using a large international dataset of multinational banks, we find evidence of a significant transmission of domestic real estate shocks into lending abroad. A 1% decrease in real estate prices in home country, in particular, leads to a 0.2-0.3% decrease in credit growth in the foreign subsidiary. This response, however, is asymmetric: only negative house price changes are transmitted. Stricter regulation of activities of parent banks can reduce this effect, indicating a role for regulation in alleviating the transmission of real estate shocks. Further, the analysis of the impact of real estate shocks on foreign subsidiary funding indicates that shocks are transmitted through changes in long-term debt funding and equity. |
| Keywords: | Internal capital markets;multinational banking;transmission of real estate shocks |
| JEL: | F23 F36 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2014011&r=opm |
| By: | Guglielmo Maria Caporale; Michael Donadelli; Alessia Varani |
| Abstract: | A canonical two country-two good model with standard preferences does not address three classic international macroeconomic puzzles as well as two well-known asset pricing puzzles. Specifically, under financial autarky, it does not account for the high real exchange rate (RER) volatility relative to consumption volatility (RER volatility puzzle), the negative RER-consumption differentials correlation (Backus-Smith anomaly), the relatively low cross- country consumption correlation (consumption correlation puzzle), the low risk-free rate (risk-free rate puzzle) and the high equity risk premium (equity premium puzzle) in the data. In this paper, we show that instead a two country-two good model with recursive preferences, international complete markets and correlated long-run innovations can address all five puzzles for a relatively large range of parameter values, specifically in the case of the US and China. Therefore, in contrast to other IBC models, its performance does not rely on any financial market imperfections. |
| Keywords: | Financial autarky, complete markets, long-run risk, anomalies |
| JEL: | F3 F4 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1362&r=opm |
| By: | Rodrigo Caputo; Mariel Siravegna |
| Abstract: | This paper addresses three policy questions related to the episodes of real exchange rate (RER) appreciation in the aftermath of the 2008-09 global financial crisis. First, we determine the extent to which recent movements in RER, in several countries, are driven by changes in RER determinants (fundamentals) and correction of past misalignments or if they constitute a movement away from equilibrium (i.e. a misalignment itself). Second, we quantify the importance of non-fundamental variables such as the interest rate differential, the rate of growth of foreign reserves and credit growth in affecting the RER short-run dynamics. Third, we assess the impact of the exchange rate regime on the RER speed adjustment, distinguishing between emerging and developed economies. We conclude that countries that experienced a significant RER appreciation, in the aftermath of the 2009 crises, were undervalued before the crisis hit. In this context, movements in the RER after the crisis were driven by correction of past misalignments as well as a reaction to movements in economic fundamentals. Finally, emerging economies with less flexible exchange rate regimes show a slower speed of RER adjustment towards its long-run equilibrium. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:718&r=opm |
| By: | Ito, Hiro (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute) |
| Abstract: | This paper presents a theoretical framework for policy making based on the “impossible trinity” or the “trilemma” hypothesis. A simple optimization model shows that placing more weight in terms of preference for each of the three open macroeconomic policies—exchange rate stability, financial market openness, and monetary policy independence—contributes to a higher level of achievement in that particular policy. The paper goes on to develop the first empirical framework in the literature to investigate the joint determination of the triad open macroeconomic policies based on the trilemma hypothesis. Results from applying the seemingly unrelated regression estimation method and employing other robustness checks show that simple economic and structural fundamentals determine the trilemma policy combinations. Finally, the paper examines how deviations from the “optimal” trilemma policy combinations evolve around the time of a financial crisis. |
| Keywords: | trilemma hypothesis; macroeconomic policy; exchange rate stability; financial market openness; monetary policy independence; financial crisis; policy combination |
| JEL: | F15 F21 F31 F36 F41 O24 |
| Date: | 2014–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0456&r=opm |
| By: | Jair N. OJeda; Julián A. Parra Polanía; Carmiña O. Vargas |
| Abstract: | This document analyzes the macroeconomic effects of a boom in a small-open economy’s natural-resource sector. We study the effects of this shock on the most important macroeconomic variables, the resource reallocation across sectors and on welfare under alternative fiscal rules. We employ a DSGE featuring three productive sectors (non-tradable, manufacturing and commodity goods), government and two types of consumers (Ricardian and non-Ricardian). Our results show that the natural-resource boom leads to an initial reduction of the manufacturing sector’s employment and production. The opposite temporal effect is obtained in the remaining two productive sectors. However, the effect on welfare is positive for all consumers since the boom increases consumption in all households. Finally, we find that a countercyclical fiscal rule leads to a slight increase in welfare compared with a balanced-budget rule. |
| Keywords: | Fiscal rule, Natural-Resource Boom, Consumer Welfare, Equilibrium Model Classification JEL: E62, F47, H30, H63 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:807&r=opm |
| By: | Robert M. Feinberg |
| Abstract: | This paper estimates a structural model of the balance of payments, with disaggregated exports (manufactured and non-manufactured) and imports (final and intermediate goods), and a reduced form model of the trade balance for the Mexican economy. The analysis identifies several structural breaks, implying a division of the entire sample period into five phases. The results indicate that a tightening of the balance-of-payments constraint may account for the slowdown in Mexico’s growth only during certain subperiods of the post-liberalization era, and that the impact of real exchange rate changes on the trade balance has diminished as a result of the increasing integration of export industries into global supply chains. The results also suggest an important asymmetry, whereby a country can grow below the rate consistent with balance-of-payments equilibrium when other constraints are more binding, but cannot sustain growth above that rate. JEL classification: F43, F14, E12, O24 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2014-01&r=opm |
| By: | Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business); Serhiy Stepanchuk (École Polytechnique Fédérale de Lausanne) |
| Abstract: | Using a stylized two period model we obtain portfolio solutions from two solution approaches that belong to the class of local approximation methods – the approach of Judd and Guu (2001, hereafter ’JG’) and the approach of Devereux and Sutherland (2010, 2011, hereafter ’DS’) – and compare them with the true portfolio solution. We parameterize the model to match mean, standard deviation, skewness and kurtosis of return data on aggregate MSCI stock market indices. The optimal equity holdings in the true solution depend on the size of uncertainty, and the precise form of this relationship is determined by the distributional properties of equity returns. While the DS method and the JG approach provide the same portfolio solution as the size of uncertainty goes to zero, else the two solutions can differ substantially. Because under the DS method portfolio holdings are never approximated in the direction of the size of uncertainty, even higher-order approximations lead to the (zero-order) constant solution in our example model. In contrast, the JG solution generally varies as the size of uncertainty changes, and already a second-order JG solution can account for effects of skewness and kurtosis of equity returns. |
| Keywords: | Country Portfolios, Solution Methods |
| JEL: | E44 F41 G11 G15 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp162&r=opm |
| By: | Faruk Balli; Faisal Rana |
| Abstract: | The sending of remittances is a decentralised decision of migrant workers, nevertheless it has its macroeconomic implication in providing insurance against domestic output shocks in the recipient economies – a phenomenon known in literature as risk sharing. Using a large sample of 86 developing countries for the period 1990–2010, we establish that remittance inflows serve as an important channel through which risk sharing takes place in the developing world. Although the extent of risk sharing on average stands at 3.3%, there is substantial cross-country variation found in our sample, ranging from 38% for Tajikistan (38%) for Haiti (-13%). Subsequently, we explore why the extent of risk sharing through remittances is so diverse across developing countries. The diversification of migrants turns out to be the leading explanation for the extent of risk sharing via remittances: the more diverse the migration destinations of a country, higher will be the amount of risk shared. In addition, the size of remittance flows appears to have a strong and statistically significant impact on enhancing risk sharing. We also find suggestive evidence that remittances originating from more distant countries facilitate more risk sharing compared to those originating from neighbouring or regional economies. Even after splitting the sample on the basis of country characteristics, our results remain robust. |
| Keywords: | Diversification, International migration, Remittances, Risk sharing |
| JEL: | F15 F22 F24 F41 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-12&r=opm |
| By: | Timmer, Marcel P.; Lashitew, Addisu A.; Inklaar, Robert (Groningen University) |
| Abstract: | When capital and labor are not allocated to the more productive firms, aggregate total factor productivity (TFP) suffers. Can this explain observed productivity differences across countries? We estimate manufacturing TFP levels for 52 developing countries and decompose it into a part due to misallocation and a part due to (residual) technology differences. The results show that removing misallocation would increase TFP by an average of 60 percent, but productivity gaps relative to the US remain large. The degree of misallocation is uncorrelated with observed productivity. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugggd:gd-143&r=opm |
| By: | Patrick Carvalho; Renee A. Fry-McKibbin |
| Abstract: | A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a byproduct of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil’s neighbouring countries, including on their foreign reserve build-ups. |
| Keywords: | Foreign exchange intervention, currency intervention, exchange rate volatility, reserve accumulation, factor model, emerging markets |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-18&r=opm |
| By: | Hirakata, Naohisa (Asian Development Bank Institute); Iwasaki, Yuto (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute) |
| Abstract: | This paper examines the international transmission effects that a positive supply shock in emerging economies may have on inflation in developed economies. A three-country dynamic stochastic general equilibrium (DSGE) model is constructed to analyze the impact of a supply shock in an emerging economy, the People's Republic of China (PRC), on inflation rates in two developed economies, Japan and the United States (US). The assumed asymmetric trade structures among the three countries and the PRC's choice of exchange rate regime appear to influence the international transmission of a supply shock in the PRC. Specifically, Japan is under a greater deflationary pressure than the US because of its vertical trade specialization vis-à-vis the PRC and the PRC's US-dollar-pegged regime. This outcome suggests that, even though Japan and the US may face common positive supply shocks from emerging economies, the deflationary impact of the shock is greater for Japan. |
| Keywords: | supply shocks; emerging economies; trade structure; exchange rate regimes; three-country DSGE model |
| JEL: | F32 F41 F44 F47 |
| Date: | 2014–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0459&r=opm |
| By: | Javier García-Cicco; Markus Kirchner; Santiago Justel |
| Abstract: | We set up and estimate a DSGE model of a small open economy to assess the role of domestic financial frictions in propagating foreign shocks. In particular, the model features two types of financial frictions: one in the relationship between depositors and banks (following Gertler and Karadi, 2011) and the other between banks and borrowers (along the lines of Bernanke et al, 1999). We use Chilean data to estimate the model, following a Bayesian approach. We find that the presence of financial frictions increases the importance of foreign shocks in explaining consumption, inflation, the policy rate, the real exchange rate and the trade balance. In contrast, under financial frictions the role of these foreign shocks in explaining output and investment is somehow reduced. The behavior of the real exchange rate and its interaction with the financial frictions is key to understand the results. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:722&r=opm |
| By: | Tovonony Razafindrabe |
| Abstract: | This paper develops an estimated multi-country open economy dynamic stochastic general equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess international transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of different size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endogenous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price inflation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from inflation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import inflation. |
| Keywords: | Pass-through, multi-country DSGE, Bayesian estimation, monetary policy |
| JEL: | F31 F41 E52 C11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-6&r=opm |
| By: | Byron S. Gangnes (UHERO, University of Hawaii at Manoa); Alyson C. Ma (University of San Diego); Ari Van Assche (HEC Montréal, Department of International Business) |
| Abstract: | Previous studies have argued that global value chains (GVCs) have increased the sensitivity of trade to external business cycle shocks. This may occur either because GVC trade is concentrated in durable goods industries, which are known to have high income elasticities (a composition effect), or because, within industries, GVC trade has a higher income elasticity than regular trade (a supply chain effect). Using Chinese trade data across customs regimes and industries during the period 1995-2009, we find evidence for the former, but not the latter. |
| Keywords: | global value chains, trade elasticities, supply chain effect, composition effect |
| JEL: | F1 F4 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:hae:wpaper:2014-2&r=opm |