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on Open Economy Macroeconomic |
| By: | Olivier Jeanne |
| Abstract: | This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a "capital war" that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons. |
| JEL: | F36 F41 F42 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19967&r=opm |
| By: | Giovanni Lombardo; Federico Ravenna |
| Abstract: | We show that the composition of international trade has important implications for the optimal volatility of the exchange rate, above and beyond the size of trade flows. Using an analytically tractable small open economy model, we characterize the impact of the trade composition on the policy trade-off and on the role played by the exchange rate in correcting for price misalignments. Contrary to models where openness can be summarized by the degree of home bias, we find that openness can be a poor proxy of the welfare impact of alternative monetary policies. Using input-output data for 25 countries we document substantial differences in the import and non-tradable content of final demand components, and in the role played by imported inputs in domestic production. The estimates are used in a richer small-open-economy DSGE model to quantify the loss from an exchange rate peg relative to the Ramsey policy conditional on the composition of imports. We find that the main determinant of the losses is the share of non-traded goods in final demand. |
| Keywords: | International Trade, Exchange Rate Regimes, Non-tradable Goods, Optimal Policy |
| JEL: | E3 E42 E52 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1410&r=opm |
| By: | Philip R. Lane (Trinity College Dublin) |
| Abstract: | This paper explores the contribution of international financial flows to the boom-bust-recovery cycle in Ireland. It finds that a nuanced interpretation is required, in that bank-intermediated debt inflows certainly contributed to the amplification of the property boom during 2003-2007 but that other types of international flows have played a stabilising role through a variety of mechanisms, with a new wave of inflows a key component of the current recovery phase. |
| Keywords: | international capital flows, euro crisis, Irish crisis |
| JEL: | E42 E60 F32 F33 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp444&r=opm |
| By: | Doireann Fitzgerald; Stefanie Haller |
| Abstract: | Aggregate exports are not very responsive to real exchange rates, though they respond strongly to trade liberalizations, a fact sometimes referred to as the International Elasticity Puzzle. We use micro data on firms and exports for Ireland to dissect the puzzle. Our identification strategy uses within-firm-year cross-market variation in real exchange rates and tariffs to identify the responses of export participation, export revenue and the product dimension of exporting to these variables. We show that (i) the weak response of export revenue of long-time market participants to real exchange rates is key to the behavior of aggregate exports, (ii) export participation also responds less to real exchange rates than to tariffs, but this alone cannot explain the puzzle; and (iii) the revenue response of long-time market participants cannot be accounted for by product entry responses. Hence any model that can successfully account for the puzzle needs to match the intensive margin responses of exporting firms. |
| JEL: | F14 F41 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19968&r=opm |
| By: | Stefano Bosi; Patrice Fontaine; Cuong Le Van |
| Abstract: | In this note, we present a wealth model of a two-country economy where ffnancial assets and goods are traded. We consider the case where the agents are risk neutral, a very common assumption in ffnance in order to have explicit solutions for prices, and in particular in international ffnance for exchange rates using the Pareto optima. We show that the Pareto optima on the international good and capital markets are found to coincide with the net trade allocations. More notably, under a no- arbitrage condition on the international capital market, we can deffne an exchange rates system for which Purchasing Power Parity (PPP) holds. And if any Pareto optimum for the international capital market and its associated commodity prices clear the trade balance then the Uncovered Interest Rate Parity (UIRP) for the international capital market holds with this exchange rates system. When the international ffnancial market are complete, this condition is also sufficient for the trade balance with any Pareto allocation and its associated commodity prices. In this case, PPP on the international good market and UIRP for the international capital market are equivalent conditions. We show through an example of risk-neutral economy where a no-arbitrage condition for assets and PPP hold, but UIRP fails, that the only individually rational Pareto allocation clearing the international good market is no-trade. Finally, we recover Dumas [3] under risk aversion in a simpliffed two-country economy with a single ffnancial asset and no exchange of commodities and we prove that the only possible equilibrium (with transfers) is no-trade. |
| Keywords: | international asset pricing, returns on securities, exchange rates, no-arbitrage condition. |
| JEL: | C6 D5 D9 F3 G1 |
| Date: | 2014–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-101&r=opm |
| By: | Vincent Bodart (Université catholique de Louvain); Jean-François Carpantier (CREA, Université de Luxembourg) |
| Abstract: | While most of the literature on the determination of real exchange rates is focused on the role of standard macroeconomic variables, there exists how- ever a few papers that are more concerned by the impact of factors which are usually considered to play a key role in the process of economic development, like demography or inequality. In the present paper, we extend this small branch of the literature by exploring the relationship between labor skills and real exchange rates over the long-run. Using panel regressions covering 22 countries over the period 1950-2010, we find that labor skills are indeed a structural determinant of real exchange rates, with a permanent increase of the skilled-unskilled labor ratio leading to a long-run appreciation of the real exchange rate. This findings is robust to the inclusion of several control variables, like those used in traditional analyses of real exchange rates. |
| Keywords: | Real exchange rate, human capital, skills, Balassa-Samuelson effect. |
| JEL: | C23 F31 F41 I25 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:14-03&r=opm |
| By: | Subramanian, Chetan; Shin, Jong Kook |
| Abstract: | �This paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic aThis paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic and foreign goods. |
| Keywords: | Noise traders; Fixed exchange rates; Tobin taxes; Optimal monetary policy. |
| JEL: | E E42 E52 F41 |
| Date: | 2014–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:37392&r=opm |
| By: | Joshua Aizenman; Mahir Binici; Michael M. Hutchison |
| Abstract: | This paper evaluates the impact of tapering “news” announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into those with “robust” fundamentals (current account surpluses, high international reserves and low external debt) and those with “fragile” fundamentals and, intriguingly, find that the stronger group was more adversely exposed to tapering news than the weaker group. News of tapering coming from Chairman Bernanke is associated with much larger exchange rate depreciation, drops in the stock market, and increases in sovereign CDS spreads of the robust group compared with the fragile group. A possible interpretation is that tapering news had less impact on countries that received fewer inflows of funds in the first instance during the quantitative years and had less to lose in terms of repatriation of capital and reversal of carry-trade activities. |
| JEL: | F3 F36 G14 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19980&r=opm |
| By: | Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg) |
| Abstract: | We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent Financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting economic adjustment paths are similar to those of the theoretical model. |
| Keywords: | New Keynesian Model, Financial Crisis, Stochastic Differential Equation, Monetary Policy, Taylor Rule |
| JEL: | C02 C63 E44 E47 E52 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201421&r=opm |
| By: | Jean-Pierre Allegret; Valérie Mignon; Audrey Sallenave |
| Abstract: | The aim of this paper is to investigate oil price shocks' effects and their associated transmission channels on global imbalances. To this end, we rely on a Global VAR approach that allows us to account for trade and Financial interdependencies between countries. Considering a sample of 30 oil-exporting and importing economies over the 1980-2011 period, we show that the nature of the shock-demand-driven or supply-driven matters in understanding the effects of oil price shocks on global imbalances. In addition, we evidence that the main adjustment mechanism to oil shocks is based on the trade channel, the valuation channel being at play only on the short run.. |
| Keywords: | oil prices, global imbalances, global VAR |
| JEL: | C32 F32 Q43 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-14&r=opm |
| By: | Lance Kent (Department of Economics, College of William and Mary) |
| Abstract: | How do international business cycles change as countries mature and become more deeply linked with their partners? This paper answers that question by establishing new stylized facts on the systematic variation in the transmission of shocks within and between countries along low-frequency trends in income, industrial structure, openness, and trade and financial linkages. Namely, this paper estimates a global "linkage VAR" where the coefficients in the global autoregressive matrix vary as linear functions of these low-frequency trends. This regression finds that when a country imports more investment or intermediate goods from a given partner country, the response of its output to shocks from its partner is amplified. When a country holds more FDI assets in a given partner country, the response of its output to shocks from its partner is dampened. The paper then poses an international real business cycle model and derives a novel application of the perturbation method to compare the changes in propagation within this model to those implied by the linkage VAR. The model performs reasonably well for some of the principal components of the distribution of observed evolution in bilateral linkages but not others. The novel methodology of this paper achieves both the estimation of new stylized facts as well as a novel way to assess structural models in light of them. |
| Keywords: | Business Cycles, Global Panel VAR, Financial Integration, Stylized Facts. |
| Date: | 2014–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:149&r=opm |
| By: | Márcia Saraiva Leon |
| Abstract: | The paper analyzes nominal yields of five-year fixed-rate Brazilian Domestic Federal Public Debt (DFPD) bonds in response to fluctuations in international net capital flows to Brazil for the period January 2007 to July 2012. The results show that estimation in differences with error correction obtains a long-run relationship between the yield, the foreign participation in the DFPD and the target Selic rate that reproduces previous results. When the ratio of net foreign long-term fixed-income investments relative to GDP is a substitute for foreign participation in the DFPD, the new explanatory variable is also significant in the long run, when the cointegrating equation includes the yield of five-year United States Treasury bonds. In turn, fiscal balance, investors’ risk aversion, output gap, the tax rate on financial transactions made by nonresident investors and the effective rate of reserve requirements influence the yields in the short run |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:345&r=opm |