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on Open Economy Macroeconomics |
| By: | Fernando Broner (CREI, Universitat Pompeu Fabra and Barcelona GSE); Alberto Martin (CREI, Universitat Pompeu Fabra and Barcelona GSE); Jaume Ventura (CREI, Universitat Pompeu Fabra and Barcelona GSE); Aitor Erce (Banco de España and European stability mechanism) |
| 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 recession, 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 sector, reducing investment and deepening the recession 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 euro zone, and how they may be addressed by policies at the European level. |
| Keywords: | sovereign debt, discrimination, crowding out, rollover crises, economic growth |
| JEL: | F32 F34 F36 F41 F43 F44 G15 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1402&r=opm |
| By: | Ezzahid, Elhadj; Maouhoub, Brahim |
| Abstract: | This paper explores the links between gradual capital account liberalization and the exchange rate regime in Morocco where the process of economic and financial openness is relatively advanced. Using a game theory model with two economic agents, that are monetary authorities and domestic firms, we explore the best choice concerning the exchange rate regime for Morocco in a context characterised by increasing openness especially of capital account. The results show that welfare under a flexible exchange rate regime is higher compared to welfare under a fixed exchange rate regime. The analysis also shows that the flexible exchange rate will improve competitiveness. However, flexibility will undermine price stability. -- |
| Keywords: | capital account liberalization,exchange rate regime,competitiveness,inflation,Morocco |
| JEL: | F31 F32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201418&r=opm |
| By: | Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Tamon, Asonuma (Asian Development Bank Institute) |
| Abstract: | This paper analyzes the optimal transition of the exchange rate regime in the People’s Republic of China (PRC). How the PRC can successfully reach the desired regime—whether a basket peg or floating regime—from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime. |
| Keywords: | exchange rate regime; exchange rate adjustment; Chinese exchange rate regime; dynamic adjustment; transition path |
| JEL: | E42 F33 F41 F42 |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0476&r=opm |
| By: | Kurmas Akdogan |
| Abstract: | Stationarity of the current account is suggested as an indicator of the current account sustainability in the literature. We explore the presence of mean-reverting behaviour in current accounts of 24 European countries, using linear and nonlinear unit root tests. Our results suggest mean reversion of the current account-to-GDP ratios for almost two-thirds of the countries in our sample, hence; provide supporting evidence for the current account sustainability of these countries. |
| Keywords: | Current account sustainability, stationarity, non-linear adjustment, non-linear models |
| JEL: | C22 F32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1411&r=opm |
| By: | Tingguo Zheng; Huiming Guo |
| Abstract: | Considering that monetary policy instability may cause indeterminacy of the macroeconomic equilibrium, this paper derives the boundary condition between determinacy and indeterminacy in a small open economy DSGE model, and then uses this model to investigate China's monetary policy and macroeconomic fluctuations under indeterminacy during the period from 1992 to 2011. The empirical results show that the nominal interest rate reacts not only to inflation and output gap, but also to the changes in RMB exchange rate. Moreover, the indeterminacy in the macro-dynamics indicates the instability in China's monetary policy, and it stems from two sources, the sunspot shock and the indeterminate propagation of fundamental shocks. In addition, we find that the monetary policy shock affects macroeconomic dynamics significantly in the short run, while in the long run, it only influences nominal variables, such as the inflation and the exchange rate, but not the real output. |
| Keywords: | Small open economy, DSGE model, Indeterminacy, Monetary policy |
| JEL: | C5 E4 E5 F4 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002201&r=opm |
| By: | Ying Fang; Shicheng Huang; Linlin Niu |
| Abstract: | We employ a Bayesian method to estimate a�time-varying coefficient version of the de facto currency basket model of�Frankel and Wei (2007) for the RMB of China, using daily data from February�2005 to July 2011. We estimate jointly the implicit time-varying weights of�all 11 currencies in the reference basket announced by the Chinese�government. We find the dollar weight has been reduced and is sometimes�significantly smaller than one, but there is no evidence of systematic�operation of a currency basket with a�discernible�pattern of significant�weights on other currencies. During specific periods, the reduced dollar weight has not been switched to other major international currencies, but�instead to some East Asian currencies, which is hard to explain by trade�importance to or trade competition with China. We examine currency baskets�of these East Asian Economies, which include major international currencies�and the RMB in their baskets. We find an evident tendency of Malaysia and�Singapore to increase the weights of RMB in their own currency baskets, and�a continuously significant positive weight of RMB in the basket of Thailand.�These findings suggest that the occasionally positive weights of some East�Asian currencies in RMB currency basket reflects the positive RMB weights in�these East Asian currency baskets, as these East Asian economies have been�systematically placing greater weights on RMB under the new regime of RMB�exchange rate. |
| Keywords: | RMB currency basket, time-varying regressions, East Asia,�China, US |
| JEL: | F31 F41 C11 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:002045&r=opm |
| By: | Bulent Ulasan |
| Abstract: | This paper examines the long-run relationship between trade open-ness and economic growth across countries over the period 1960-2000. Two strategies are followed in empirical investigation. First, we extend the augmented neo-classical growth model with an openness variable and estimate it by using a battery of openness measures suggested in the literature. We also construct three composite trade policy indexes consisting of weighted averages of tari® rates, non-tari® barriers and black market premium for foreign exchange rate. Second, we implement Bayesian model averaging technique to deal with the model uncertainty, a fundamental problem which has been plaguing the previous works on the topic. Our ¯ndings show that there is no robust link between trade openness and long-run economic growth. |
| Keywords: | Economic Growth, Trade Openness, Cross-Country Growth Regression, Model Uncertainty, Bayesian Model Averaging |
| JEL: | F43 O47 C11 C21 C52 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1407&r=opm |
| By: | Daniela Hauser |
| Abstract: | We provide evidence regarding the dynamic behaviour of net labour flows across U.S. states in response to a positive technology shock. Technology shocks are identified as disturbances that increase relative state productivity in the long run for 226 state pairs, encompassing 80 per cent of labour flows across U.S. states in the 1976 - 2008 period. The data suggest heterogeneous responses of both employment and net labour flows across states, conditional on a positive technology shock. We build a two-region dynamic stochastic general equilibrium (DSGE) model with endogenous labour mobility and region-specific shocks to account for this evidence. We calibrate the model economy consistently with the observed differences in the degree of nominal rigidities across states, and show that we replicate the different patterns of the responses in employment and net labour flows across states following a technology shock. |
| Keywords: | Business fluctuations and cycles; Labour markets |
| JEL: | E24 E32 J61 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:14-4&r=opm |
| By: | Jaehun Chung; Yongmiao Hong |
| Abstract: | We examine directional predictability in foreign exchange markets using a model-free statistical evaluation procedure. Based on a sample of foreign exchange spot rates and futures prices in six major currencies, we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns, but also the past history of interest rate differentials, suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates. This evidence becomes stronger when the direction of larger changes is considered. We further document that despite the weak conditional mean dynamics of foreign exchange returns, directional predictability can be explained by strong dependence derived from higher-order conditional moments such as the volatility, skewness and kurtosis of past foreign exchange returns. Moreover, the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability. We also examine the co-movements between two foreign exchange rates, particularly the co-movements of joint large changes. There exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials. Furthermore, both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes. Several sources can explain this directional predictability of joint changes, including the level and volatility of underlying currency returns. |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002068&r=opm |
| By: | Gilchrist, S.; Mojon, B. |
| Abstract: | We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizeable contractions in output, increases in unemployment, and declines in inflation across the euro area. |
| Keywords: | credit cycle, euro area, financial crisis. |
| JEL: | E32 E43 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:482&r=opm |
| By: | Marc K Chan (Economics Discipline Group, University of Technology, Sydney) |
| Abstract: | This paper analyzes the effects of a pilot program that enables cross-market investment between Hong Kong and Shanghai's stock exchanges. Among the companies that are concurrently listed in both markets, the announcement of the program causes the price disparity between shares in both markets to reduce by an average of 16.6 percent within the same day of announcement. The price convergence is directly proportional to the magnitude of preexisting price disparity. Despite the large institutional differences between both markets, the prices converge symmetrically via initial share price increases in the market that traded the stock at a relative discount. The results suggest that capital control plays an important role in explaining the disparity of equity prices between markets. |
| Keywords: | Capital account liberalization; Chinese reform; law of one price; dual-listed shares; natural experiment |
| JEL: | O16 F32 |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:22&r=opm |
| By: | Erik Makela (Department of Economics, University of Turku) |
| Abstract: | The objective of this paper is to figure out how the Economic and Monetary Union in Europe (EMU) has affected on its member’s sovereign risk-premiums and long-term government bond yields. In order to estimate the effect, this paper utilizes synthetic control method. Contrary to the popular belief, this paper finds that the majority of member countries did not receive economic gains from EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, France, Germany and Netherlands have paid positive and substantial euro-premium in their 10-year government bonds since the adoption of single currency. After the latest financial crisis, government bond yields have been higher in all member countries compared to the situation that would have been without monetary unification. This paper concludes that from the sovereign borrowing viewpoint, it would be beneficial for a country to maintain its own currency and monetary policy. |
| Keywords: | Synthetic Control Method, Monetary Union, Sovereign Risk, Government Bond Yield |
| JEL: | F34 E42 G15 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp90&r=opm |
| By: | Marshall Reinsdorf; Robert Yuskavage (Bureau of Economic Analysis) |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bea:wpaper:0109&r=opm |