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on Open Economy Macroeconomics |
| By: | Correa, Ricardo (Board of Governors of the Federal Reserve System (U.S.)); Goldberg, Linda (Federal Reserve Bank of New York); Rice, Tara (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | While the balance sheet structure of U.S. banks influences how they respond to liquidity risks, the mechanisms for the effects on and consequences for lending vary widely across banks. We demonstrate fundamental differences across banks without foreign affiliates versus those with foreign affiliates. Among the nonglobal banks (those without a foreign affiliate), cross-sectional differences in response to liquidity risk depend on the banks' shares of core deposit funding. By contrast, differences across global banks (those with foreign affiliates) are associated with ex ante liquidity management strategies as reflected in internal borrowing across the global organization. This intra-firm borrowing by banks serves as a shock absorber and affects lending patterns to domestic and foreign customers. The use of official-sector emergency liquidity facilities by global and nonglobal banks in response to market liquidity risks tends to reduce the importance of ex ante differences in balance sheets as drivers of cross-sectional differences in lending. |
| Keywords: | International banking; global banking; liquidity; transmission; internal capital market |
| Date: | 2014–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1105&r=opm |
| By: | Ronald McKINNON (University of Stanford) |
| Abstract: | Because the U.S. Federal Reserve’s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets (EM) with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States (and to other industrial countries) as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, African countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and—being less industrialized—they are more vulnerable to fluctuations in prices of their commodity exports. Supply-side shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity. But joint fluctuations in the prices of all primary products— minerals, energy, cereals, and so on—reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:fdi:wpaper:1678&r=opm |
| By: | Ehsan U. Choudhri (Department of Economics, Carleton University); Dalia S. Hakura (International Monetary Fund) |
| Abstract: | Using both regression- and VAR-based estimates, the paper finds that the exchange rate pass-through to import prices for a large number of countries is incomplete and larger than the pass-through to export prices. Previous studies have reported similar results, which give rise to the puzzle that while local currency pricing is needed to account for incomplete import price pass-through, it would not imply a lower export price pass-through. Recent explanations of this puzzle have emphasized markup adjustment in response to exchange rate changes. This paper suggests an alternative explanation based on the presence of both producer and local currency pricing. Using a dynamic general equilibrium model, the paper shows that a mix of producer and local currency pricing can explain the pass-through evidence even with a constant markup. The model can also explain the observed variability of key variables as well as the fact that the regression and VAR estimates tend to be similar. |
| Keywords: | Exchange rate pass-through; import and export prices; nominal rigidities; currency choice |
| JEL: | E31 F42 E52 F41 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:14-09&r=opm |
| By: | Thierry Tressel; Shengzu Wang |
| Abstract: | The paper examines progress with the external rebalancing of euro area deficit countries. Relative prices are adjusting at different pace across countries and with different compositions of wage cuts and labor shedding. There is so far limited evidence of resource re-allocation from non-tradable to tradable sectors, while improved export performance is still dependent on external demand from the rest of world. Current account adjustments have taken place, reflecting structural changes but also cyclical forces, suggesting that part of the improvements may unwind when cyclical conditions improve. Looking ahead, relying only on relative price adjustments (which adversely affects demand) to rebalance the euro area could prove very challenging. Structural reforms will play an important role in the reallocation of resources to the tradable sector and the associated relative price adjustment, while boosting non-price and price competitiveness. |
| Date: | 2014–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/130&r=opm |
| By: | Giorgio Di Giorgio (LUISS Guido Carli, Department of Economics and Finance, Rome (Italy)); Salvatore Nisticò (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome); Guido Traficante (European University of Rome) |
| Abstract: | This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange-rate response to fiscal shocks in dynamic open-economy models. Our analysis compares the classic Redux model of Obstfeld and Rogoff (1995) and a modern New Keynesian DSGE two-country model, and highlights the substantially different transmission mechanism between the two. |
| Keywords: | Redux Model, Exchange Rate, Fiscal Shocks, Endogenous Monetary and Fiscal Policy. |
| JEL: | E52 E62 F41 F42 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:5/14&r=opm |
| By: | Kerl, Cornelia (Deutsche Bundesbank); Niepmann, Friederike (Federal Reserve Bank of New York) |
| Abstract: | Several recent studies document that the extent to which banks transmit shocks across borders depends on the type of foreign activities these banks engage in. This paper proposes a model to explain the composition of banks’ foreign activities, distinguishing between international interbank lending, intrabank lending, and cross-border lending to foreign firms. The model shows that the different activities are jointly determined and depend on the efficiencies of countries’ banking sectors, differences in the return on loans across countries, and impediments to foreign bank operations. Specifically, the model predicts that international interbank lending increases and lending to foreign nonbanking firms declines when banks’ barriers to entry rise, a hypothesis supported by German bank-level data. This result suggests that policies that restrict the operations of foreign banks in a country may move activity onto international interbank markets, with the potential to make domestic credit overall less resilient to financial distress. |
| Keywords: | global banks; interbank market; international bank flows; transmission of shocks |
| JEL: | F21 F23 F30 G21 |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:681&r=opm |
| By: | Josué Fernando Cortés Espada |
| Abstract: | This paper estimates the magnitude of the exchange rate pass-through to consumer prices in Mexico. Moreover, it analyzes if the pass-through dynamics have changed in recent years. In particular, it uses a methodology that generates results consistent with the hierarchy implicit in the CPI. The results suggest that the exchange rate pass-through to the general price level is low and not statistically significant. However, the pass-through is positive and significant for goods prices. Furthermore, the exchange rate pass-through declined over the 2000's and the depreciation observed in 2011 did not change this trajectory. |
| Keywords: | Depreciation, Inflation, Exchange Rate Pass-through |
| JEL: | E31 F31 F41 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2013-02&r=opm |
| By: | Masahiro Kawai (Asian Development Bank Institute (ADBI)); Victor Pontines |
| Abstract: | With the rise of the People’s Republic of China (PRC) as the world’s largest trading nation (measured by trade value) and second largest economic power (measured by GDP), its economic influence over the neighboring emerging economies in East Asia has also risen. The PRC introduced some exchange rate flexibility in July 2005, and in the wake of the global financial crisis has been pursuing a policy to internationalize its currency, the renminbi (RMB). Clearly the exchange rate policy of the PRC has significant implications for exchange rate regimes in emerging East Asia. This paper examines the behavior of the RMB exchange rate and the impact of RMB movements on those of other currencies in emerging East Asia during the period 2000–2014. We apply the Frankel–Wei regression model to identify changes in the RMB exchange rate regime over time and a modified version of the model, developed by the authors in their earlier paper, to estimate the RMB weight in an emerging East Asian economy’s currency basket. We find that the US dollar continues to be the dominant anchor currency in the region, while the RMB has taken on increasing importance in the currency baskets of many East Asian economies in recent years. The paper also explores how monetary and currency cooperation—led by the PRC and Japan—can promote intra-East Asian exchange rate stability under the pressure of rising financial market openness in the PRC. |
| Keywords: | Remminbi, China, PRC, exchange rate regime, East Asia, exchange rate policy, the Frankel–Wei model, Japan, financial market openness |
| JEL: | F15 F31 F36 F41 O24 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:24218&r=opm |
| By: | Karl Farmer (University of Graz); Irina Ban (Babes-Bolyai-University Cluj-Napoca) |
| Abstract: | Intra-EMU external imbalances in the pre-crisis period up to 2008 are traditionally explained by EMU-oriented factors, e.g. euro-related financial integration. Chen et al. (2013) also emphasize external trade shocks, such as the competitive challenge of emerging Asia and oil exporters to EMU-periphery's exports. Moreover, Asian-US external imbalances are attributed to financial integration between East Asia and the USA in the aftermath of the East-Asian currency crises in the late 1990s (Angeletos et al. 2011). Acknowledging these empirical facts this paper develops a Buiter (1981) three-country (EMU, Asia, US), two-region (EMU core, EMU periphery) OLG model to investigate the effects of both intra-EMU and Asian-US financial integration on intra- EMU, Asian and US external imbalances. We find that the widening of the intra-EMU external imbalances, in particular of trade imbalances, is related to the growth in Asian-US imbalances and the dynamic inefficiency of the world economy, caused by excessive saving in Asia. |
| Keywords: | External Imbalances; European Economic and Monetary Union; Overlapping Generations; Three-Country Model |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2014-06&r=opm |
| By: | Amado, María (UCLA) |
| Abstract: | This document to evaluates the effectiveness, in terms of macroeconomic stability, of monetary policy rules and instruments of prudential supervision. Specifically, it seeks to distinguish between the gains of including in the standard monetary policy rule indicators of financial stress, such as credit growth -augmented rule-; and the gains of applying, in parallel to this augmented rule, a macroprudential instrument that allows a supervisory authority to affect credit interest rates directly. This analysis is performed using a dynamic stochastic general equilibrium model for a small open economy with financial rigidities, and is evaluated in the context of four shocks: financial, productivity, foreign demand and foreign interest rate. The model is calibrated in order to reflect the stylized facts of the Peruvian economy. The results obtained suggest that the effectiveness of the rules depends on the nature of the shock affecting the economy. |
| Keywords: | macroprudential, monetary policy, small open economy, DSGE model |
| JEL: | E52 E61 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2014-009&r=opm |