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on Open Economy Macroeconomics |
| By: | Reinhart, Carmen M.; Rogoff, Kenneth |
| 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. |
| JEL: | E44 E6 F3 F34 G1 H6 N10 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9750&r=opm |
| By: | Daniel Carvalho |
| Abstract: | This paper studies how international capital flows affect domestic credit and money holdings. While previous studies have focused on credit growth and highlighted the importance of the equity/debt mix of flows, this paper shows that there are also important implications of flows going to different domestic recipient sectors, especially concerning money dynamics. In particular, cross-border banking flows display a strong comovement with credit but none with broad money; in turn, flows of domestic non-banks display comovement with both credit and money. For this reason, banking flows correlate with the decoupling of these two variables – the Great Leveraging –, a stylised fact documented for several economies in the past decades and associated to the rapid expansion of banks non-monetary liabilities. These results thus shed light on the mechanisms through which the international banking activity might have consequences for the composition of the domestic bank balance sheet. |
| JEL: | E44 F30 G15 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201407&r=opm |
| By: | Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick |
| Abstract: | In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention. |
| Keywords: | China; Exchange rate policy; International reserves |
| JEL: | E58 F31 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9666&r=opm |
| By: | Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University) |
| Abstract: | We apply a Ramsey-type analysis to a standard sticky price, small open economy model, examining the welfare implications of optimal capital controls under fixed exchange rates and optimal monetary policy under flexible exchange rates. We show that capital controls can significantly reduce the gap between the welfare levels under fixed and flexible exchange rates. |
| Keywords: | Optimal capital controls, Optimal monetary policy, Ramsey policy, Exchange rate regimes, Small open economy, Sticky prices, Welfare comparison, Incomplete markets |
| JEL: | E5 F4 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2014-25&r=opm |
| By: | Hale, Galina B; Obstfeld, Maurice |
| Abstract: | Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro's introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery. |
| Keywords: | EMU; euro crisis; global imbalances; international banking; international debt |
| JEL: | F32 F34 F36 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9937&r=opm |
| By: | Bussière, Matthieu; Lopez, Claude; Tille, Cédric |
| Abstract: | While the impact of exchange rate changes on economic growth has long been an issue of key importance in international macroeconomics, it has received renewed attention in recent years, owing to weaker growth rates and the debate on “currency wars”. However, in spite of its prevalence in the policy debate, the connection between real exchange rates and growth remains an unsettled question in the academic literature. We fill this gap by providing an empirical assessment based on a broad sample of emerging and advanced economies. We assess the impact of appreciations, productivity booms and capital flow surges using a propensity-score matching approach to address causality issues. We show that appreciations associated with higher productivity have a larger impact on growth than appreciations associated with capital inflows. Furthermore, the appreciation per se tends to have a negative impact on growth. We provide a simple theoretical model that delivers the contrasted growth-appreciation pattern depending on the underlying shock. The model also implies adverse effects of shocks to international capital flows, so concerns about an appreciation are not inconsistent with concerns about a depreciation. The presence of an externality through firms’ destruction leads to inefficient allocations. Nonetheless, addressing them does not require a dampening of exchange rate movements. |
| Keywords: | currency crises; exchange rate; international capital flows; lending boom; small open economy macroeconomics |
| JEL: | F10 F30 F41 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9938&r=opm |
| By: | In 'T Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas |
| Abstract: | We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany’s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak. |
| Keywords: | Current Account; estimated DSGE model; Eurozone crisis; intra-European imbalances; monetary union |
| JEL: | E3 F21 F3 F4 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9933&r=opm |
| By: | Gabaix, Xavier; Maggiori, Matteo |
| Abstract: | We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only rationalizes the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. We derive conditions under which heterodox government financial policies, such as currency interventions and taxation of capital flows, can be welfare improving. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment. |
| Keywords: | Capital Flows; Exchange Rate Disconnect; Foreign Exchange Intervention; Limits of Arbitrage |
| JEL: | E42 E44 F31 F32 F41 F42 G11 G15 G20 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9842&r=opm |
| By: | Broner, Fernando A; Erce, Aitor; Martin, Alberto; Ventura, Jaume |
| 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 euro zone, and how they may be addressed by policies at the European level. |
| Keywords: | crowding out; discrimination; economic growth; rollover crises; sovereign debt |
| JEL: | F32 F34 F36 F41 F43 F44 G15 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9761&r=opm |
| By: | In 'T Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner |
| Abstract: | We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as a fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households; firm credit constraints tightened later and more gradually, and contributed much less to the slump. |
| Keywords: | boom-bust cycle; European Monetary Union; financial frictions; housing market; international capital flows; Spain; sudden stop |
| JEL: | C11 E21 E32 E62 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9957&r=opm |
| By: | Estrada García, Ángel; Galí, Jordi; Lopez-Salido, David |
| Abstract: | We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples. |
| Keywords: | competitiveness; current account imbalances; inflation differentials; labor markets; macroeconomic convergence; relative prices |
| JEL: | E24 F31 O47 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9685&r=opm |
| By: | Jeanne, Olivier |
| 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. |
| Keywords: | Capital Controls; Capital Flows; International Policy Coordination; International Reserves; Liquidity Trap; Macroprudential Policy |
| JEL: | F36 F41 F42 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9875&r=opm |
| By: | Jordà, Òscar; Schularick, Moritz; Taylor, Alan M. |
| Abstract: | Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sec- tor deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now. |
| Keywords: | booms; business cycles; financial crises; leverage; local projections; recessions |
| JEL: | C14 C52 E51 F32 F42 N10 N20 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9678&r=opm |
| By: | Galí, Jordi; Monacelli, Tommaso |
| 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 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: | currency unions; exchange rate policy; exchange rate regime; monetary policy rules.; New Keynesian model; nominal rigidities; stabilization policies; stabilization policy; sticky wages |
| JEL: | E32 E52 F41 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9806&r=opm |
| By: | Rose, Andrew K |
| Abstract: | In contrast to earlier recessions, the monetary regimes of many small economies have not changed in the aftermath of the global financial crisis. This is due in part to the fact that many small economies continue to use hard exchange rate fixes, a reasonably durable regime. However, most of the new stability is due to countries that float with an inflation target. Though a few have left to join the Eurozone, no country has yet abandoned an inflation targeting regime under duress. Inflation targeting now represents a serious alternative to a hard exchange rate fix for small economies seeking monetary stability. Are there important differences between the economic outcomes of the two stable regimes? I examine a panel of annual data from more than 170 countries from 2007 through 2012 and find that the macroeconomic and financial consequences of regime-choice are surprisingly small. Consistent with the literature, business cycles, capital flows, and other phenomena for hard fixers have been similar to those for inflation targeters during the Global Financial Crisis and its aftermath. |
| Keywords: | crisis; data; empirical; exchange rate; financial; float; hard fix; inflation; panel; recession; target |
| JEL: | E58 F33 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9684&r=opm |
| By: | Thorvaldur Gylfason; Gylfi Zoega |
| Abstract: | Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-08 another national treasure the sovereign's AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years. |
| Keywords: | Natural resource curse, Dutch disease, financial crisis |
| JEL: | F41 O23 O33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:138&r=opm |
| By: | Chen, Natalie; Juvenal, Luciana |
| Abstract: | This paper investigates the heterogeneous response of exporters to real exchange rate fluctuations due to product quality. We model theoretically the effects of real exchange rate changes on the optimal price and quantity responses of firms that export multiple products with heterogeneous levels of quality. The model shows that the elasticity of demand perceived by exporters decreases with a real depreciation and with quality, leading to more pricing-to-market and to a smaller response of export volumes to a real depreciation for higher quality goods. We test empirically the predictions of the model by combining a unique data set of highly disaggregated Argentinean firm-level wine export values and volumes between 2002 and 2009 with experts wine ratings as a measure of quality. In response to a real depreciation, we find that firms significantly increase more their markups and less their export volumes for higher quality products, but only when exporting to high income destination countries. These findings remain robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality. |
| Keywords: | Exchange rate pass-through; exports; firms; pricing-to-market; quality; unit values; wine |
| JEL: | F12 F14 F31 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9744&r=opm |
| By: | Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea |
| Abstract: | Abstract. We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period. |
| Keywords: | Capital flows; Collateral constraints; Global imbalances; House prices; Household debt |
| JEL: | E21 F32 G21 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9729&r=opm |
| By: | Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R |
| Abstract: | In response to the global financial crisis a new policy paradigm emerged in which capital controls and other quantitative restrictions on credit flows have become part of the standard crisis prevention policy toolkit. A new strand of theoretical literature studies the use of capital controls in a context in which pecuniary externality justifies policy interventions. Within the same theoretical framework adopted in this literature, we show that the optimal design of crisis prevention (ex-ante) policies depends on the effectivness of crisis management (ex-post) policies. This interaction between ex-ante and ex-post policies gives rise to a new rationale for the use of capital controls. Specifically, we show that when ex-post policies are effective in containing crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail efficiency costs and hence lose effectiveness, then the optimal policy mix consists of both ex-ante and ex-post interventions so that crises prevention policies become desirable. In our model, the optimal policy mix combines capital controls in tranquil times with real exchange rate support to limit its depreciation during crises times and yields welfare gains of more than 1% in consumption equivalence terms. |
| Keywords: | Capital Controls; Financial Crises; Financial Frictions; Macro-prudential policies; Pecuniary Externality; Real Exchange Rate |
| JEL: | E52 F37 F41 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9936&r=opm |
| By: | Corsetti, Giancarlo; Kuester, Keith; Meier, André; Müller, Gernot |
| Abstract: | Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this "sovereign risk channel." The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent self-fulfilling debt crises. |
| Keywords: | euro area; monetary union; pooling of sovereign risk; risk premium; sovereign risk channel; zero lower bound |
| JEL: | E62 F41 F42 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9723&r=opm |
| By: | Accominotti, Olivier; Eichengreen, Barry |
| Abstract: | We present new data documenting European capital issues in major financial centers from 1919 to 1932. Push factors (conditions in international capital markets) perform better than pull factors (conditions in the borrowing countries) in explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centers at the end of the 1920s figured importantly in the decline in foreign lending. We draw parallels with Europe today. |
| Keywords: | Capital flows; Europe; Great Depression; Sudden Stop |
| JEL: | F21 F32 F34 N13 N24 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9670&r=opm |
| By: | Aron, Janine; Creamer, Kenneth; Muellbauer, John; Rankin, Neil |
| Abstract: | A sizeable literature examines exchange rate pass-through to disaggregated import prices but very few micro-studies focus on consumer prices. This paper explores exchange rate pass-through to consumer prices in South Africa during 2002-2007, using a unique data set of highly disaggregated data at the product and outlet level. The paper adopts an empirical approach that allows pass-through to be calculated over various horizons, including controls for domestic and foreign costs. It studies how pass-through differs across types of consumption goods and services and draws some aggregate implications about pass-through, using actual weights from the CPI basket. The heterogeneity of pass-through for different food sub-components and the role of switches between import and export parity pricing of maize is investigated and found significant for five out of ten food sub-components. Overall pass-through to the almost 63 percent of the CPI covered is estimated at about 30 percent after two years, but is higher for food. |
| Keywords: | consumer prices; CPI; exchange rate pass-through; exchange rate volatility; food prices; goods prices; monetary policy; services prices |
| JEL: | C23 C51 C52 E3 E31 E52 E58 F31 F39 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9735&r=opm |
| By: | Brückner, Markus; Gradstein, Mark |
| Abstract: | This paper provides instrumental variables estimates of the response of aggregate private consumption to transitory output shocks in poor countries. To identify exogenous, unanticipated, idiosyncratic and transitory variations in national output we use year-to-year variations in rainfall as an instrumental variable in a panel of 39 sub-Saharan African countries during the period 1980-2009. Our estimates yield a marginal propensity to consume out of transitory output of around 0.2. To explain this result we show, using instrumental variables techniques, that there is a significant negative effect of transitory output shocks on net current transfers and a significant positive and quantitatively large effect on the trade balance. An important implication is that frictions to private financial flows do not necessarily imply large effects of transitory shocks to aggregate output on private consumption in poor countries. |
| Keywords: | Consumption; International Capital Flows; Net Current Transfers; Permanent Income Hypothesis; Risk Sharing; Transitory Output Shocks |
| JEL: | E21 F32 F35 F41 O55 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9658&r=opm |
| By: | Kriwoluzky, Alexander; Müller, Gernot; Wolf, Martin |
| Abstract: | Sovereign yield spreads within currency unions may reflect the risk of outright default. Yet, if exit from the currency union is possible, spreads may also reflect currency risk. In this paper, we develop a New Keynesian model of a small member country of a currency union, allowing both for default within and exit from the union. Initially, the government runs excessive deficits as a result of which it lacks the resources to service the outstanding debt at given prices. We establish two results. First, the initial policy regime is feasible only if market participants expect a regime change to take place at some point, giving rise to default and currency risk. Second, the macroeconomic implications of both sources of risk differ fundamentally. We also analyze the 2009--2012 Greek crisis, using the model to identify the beliefs of market participants regarding regime change. We find that currency risk accounts for about a quarter of Greek yield spreads. |
| Keywords: | currency risk; Currency union; default; euro; exit; fiscal deficits; Greek crisis; irreversibility; spreads |
| JEL: | E62 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9635&r=opm |
| By: | Auer, Raphael; Mehrotra, Aaron |
| Abstract: | Some observers argue that increased real integration has led to greater co-movement of prices internationally. We examine the evidence for cross-border price spillovers among economies participating in the pan-Asian cross-border production networks. Starting with country-level data, we find that both producer price and consumer price inflation rates move more closely together between those Asian economies that trade more with one another, ie that share a higher degree of trade intensity. Next, using a novel data set based on the World Input-Output Database (WIOD), we examine the importance of the supply chain for cross-border price spillovers at the sectoral level. We document the increasing importance of imported intermediate inputs for economies in the Asia-Pacific region and examine the impact on domestic producer prices of changes in costs of imported intermediate inputs. Our results suggest that real integration through the supply chain matters for domestic price dynamics in the Asia-Pacific region. |
| Keywords: | Asian manufacturing supply chain; globalisation; inflation; price spillovers; supply chain |
| JEL: | E31 F14 F15 F4 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9949&r=opm |
| By: | Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio |
| Abstract: | The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation. |
| Keywords: | Market deregulation; Monetary union; Optimal monetary policy |
| JEL: | E24 E32 E52 F41 J64 L51 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9742&r=opm |
| By: | di Giovanni, Julian; Levchenko, Andrei A.; Ortega, Francesc |
| Abstract: | This paper evaluates the global welfare impact of observed levels of migration using a quantitative multi-sector model of the world economy calibrated to aggregate and firm-level data. Our framework features cross-country labor productivity difference, international trade, remittances, and a heterogeneous workforce. We compare welfare under the observed levels of migration to a no-migration counterfactual. In the long run, natives in countries that received a lot of migration -- such as Canada or Australia -- are better off due to greater product variety available in consumption and as intermediate inputs. In the short run the impact of migration on average welfare in these countries is close to zero, while the skilled and unskilled natives tend to experience welfare changes of opposite signs. The remaining natives in countries with large emigration flows -- such as Jamaica or El Salvador -- are also better off due to migration, but for a different reason: remittances. The welfare impact of observed levels of migration is substantial, at about 5 to 10% for the main receiving countries and about 10% in countries with large incoming remittances. Our results are robust to accounting for imperfect transferability of skills, selection into migration, and imperfect substitution between natives and immigrants. |
| Keywords: | International Trade; Migration; Remittances; Welfare |
| JEL: | F12 F15 F22 F24 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9919&r=opm |
| By: | Feenstra, Robert; Luck, Philip; Obstfeld, Maurice; Russ, Katheryn N. |
| Abstract: | The elasticity of substitution between goods from different countries—the Armington elasticity—is important for many questions in international economics, but its magnitude is subject to debate: the "macro" elasticity between home and import goods is often found to be smaller than the "micro" elasticity between foreign sources of imports. We investigate these two elasticities in a model using a nested CES preference structure. We explore estimation techniques for the macro and micro elasticities using both simulated data from a Melitz-style model, and highly disaggregate U.S. production data matched to Harmonized System trade data. We find that in up to one-half of goods there is no significant difference between the macro and micro elasticities, but in the other half of goods the macro elasticity is significantly lower than the micro elasticity, even when they are estimated at the same level of disaggregation. |
| Keywords: | Armington elasticity; CGE trade models; disaggregate trade equations; effects of devaluation; elasticity of trade |
| JEL: | F12 F14 F42 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9951&r=opm |
| By: | Zhang, Liqing (Asian Development Bank Institute); Tao, Kunyu (Asian Development Bank Institute) |
| Abstract: | Despite the increasing recognition that the renminbi (RMB) may eventually become a key global currency, several important questions remain to be answered. This paper analyzes the benefits and costs of the RMB becoming an international currency. The benefits include reduced exchange risk, promotion of the development of the financial market, and expansion of firms in the People’s Republic of China. The costs include general costs, which complicate monetary policy and exchange rate policy, and several transitional risks. The study argues that the benefits of RMB internationalization should surpass the costs, particularly in the long run, and provides comprehensive policy choices for a sustainable process of RMB internationalization. |
| Keywords: | renminbi internationalization; financial development; transitional risks; international monetary system |
| JEL: | F31 F36 F42 |
| Date: | 2014–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0481&r=opm |