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on Open Economy Macroeconomics |
| By: | Philip R. Lane; Gian-Maria Milesi-Ferretti |
| Abstract: | This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow†and “stock†imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reductionâ€, with “expenditure switching†only playing a limited role. |
| Keywords: | Global imbalances;Latin America;Caribbean;Current account deficits;Fiscal adjustment;Cross country analysis;Global crisis, Current account adjustment |
| Date: | 2014–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/151&r=opm |
| By: | Bems, Rudolfs |
| Abstract: | This paper proposes a methodology for tracing out the effect of intermediate inputs, including ‘processing trade’, on the link between external rebalancing and relative price adjustment. We find that neglect of inputs distorts parameterization of the traditional multi-sector macro model. Distortions affect the link between external rebalancing and relative price through several opposing channels. (1) Mismeasured imported inputs exaggerate economic openness and understate the price response to rebalancing. (2) Mismeasured domestic inputs increase cross- sectoral asymmetry in openness, leading to an overstated price response. (3) Mismeasured price elasticities tend to overstate the price response. (4) Distortions in model parameters interact to generate a sizable further understatement of the price response. Quantitative results show that the identified channels can each be significant in economic terms. JEL Classification: F32, F41 |
| Keywords: | external sector adjustment, intermediate inputs, real exchange rate, transfer problem |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141699&r=opm |
| By: | Joshua Aizenman; Daniel Riera-Crichton |
| Abstract: | We analyze the degree to which the growing importance of sovereign wealth funds [SWFs] and the diffusion of inflation targeting and augmented Taylor rules have impacted the post crisis adjustment of Latin American Countries (LATAM) to the challenges associated with terms of trade and financial shocks. We confirm that active international reserves management reduces the effects of transitory Commodity Terms of Trade (CTOT) shocks to the real exchange rate [REER] and the real GDP in LATAM economies. These buffer effects work more against the risks of real appreciation than against depreciations, under relatively high levels of external debt and in economies that are less open to trade. Fixed exchange regimes act as a substitute policy to reserve accumulation. In contrast to reserves, SWFs buffers the REER from CTOT shocks with fixed exchange rate regimes and in relatively closed economies. The buffer effect of reserve accumulation appears to be strongest during the 1980-2007 period. While the stock of reserves fails to smooth the transmission of CTOT shocks to REER during the Global Financial Crisis (2008-2009), SWFs stepped up as substitutes to traditional reserve assets. The international reserve buffering role resumes during the post-great recession period (2010-2013), but not at the levels observed prior to the crisis. We observe a "substitution" between reserves and SWFs, where SWFs take over the buffering role of the REER and the real GDP during the Great Recession and the post-Great Recession period. Inflation targeting (IT) policy matters: IT countries give up the use of reserves to buffer against CTOT shocks, relegating this role to the SWFs. In LATAM countries that follow augmented Taylor rules, their monetary authorities place large weights on output gaps; while inflation gains importance for IT countries. Countries switch from REER stabilization targets to inflation targets when committing to a formal IT rule. SWFs may provide IT countries with an alternative form of liquidity management against foreign shocks when traditional reserves are committed to other macroeconomic goals. This is true for both REER and output growth stabilization. |
| JEL: | F15 F31 F32 F36 O13 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20646&r=opm |
| By: | Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Sahoko Kaji; Tamon Asonuma |
| Abstract: | This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. We demonstrate the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large. |
| Keywords: | Southeast Asia, East Asia, exchange rate regime, Emerging Countries, basket-peg regime, floating regime |
| JEL: | E42 F33 F41 F42 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:24519&r=opm |
| By: | Clancy, Daragh (Central Bank of Ireland); Jacquinot, Pascal (European Central Bank); Lozej, Matija (Bank of Slovenia) |
| Abstract: | Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable. |
| Keywords: | Fiscal policy, Public capital, Imbalances, Trade. |
| JEL: | E22 E62 H54 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:12/rt/14&r=opm |
| By: | Yoshiyasu Ono |
| Abstract: | This paper presents a two-country two-commodity dynamic model with free international asset trade in which one country achieves full employment and the other suffers long-run unemployment. Own and spill-over effects of changes in policy, technological and preference parameters that emerge through exchange-rate adjustment are examined. Parameter changes that worsen the stagnant countryfs current account depreciate the home currency, expand home employment and improve the foreign terms of trade, making both countries better off. The stagnant countryfs foreign aid to the fully employed country also yields the same beneficial effects. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0893r&r=opm |
| By: | Kevin Stahler (Peterson Institute for International Economics); Arvind Subramanian (Peterson Institute for International Economics) |
| Abstract: | Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost developments, appear sensible and in line with what the economic analyst might have predicted and the economic doctor might have ordered. But a broader and arguably better--Balassa-Samuelson-Penn (BSP)--framework for analyzing these adjustments paints a very different picture. Taking advantage of the newly released PPP-based estimates of the International Comparison Program (2011), we identify a causal BSP relationship. We apply this framework to computing more appropriate measures of real competitiveness changes in Europe and other advanced economies in the aftermath of the recent global crises. There has been a deterioration, not improvement, in competitiveness in the periphery countries between 2007 and 2013. Second, the pattern of adjustment within the eurozone has been dramatically perverse, with Germany having improved competitiveness by 9 percent and with Greece's having deteriorated by 9 percent. Third, real competitiveness changes are strongly correlated with nominal exchange rate changes, which suggests the importance of having a flexible (and preferably independent) currency for effecting external adjustments. Fourth, internal devaluation--defined as real competitiveness improvements in excess of nominal exchange rate changes--is possible but seems limited in scope and magnitude. Our results are robust to adjusting the BSP framework to take account of the special circumstances of countries experiencing unemployment. Even if we ignore the BSP effect, the broad pattern of limited and lopsided adjustment in the eurozone remains. |
| Keywords: | Eurozone, Competitiveness, Exchange Rates, Monetary Unions |
| JEL: | F31 F41 F42 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp14-10&r=opm |
| By: | Plamen Iossifov; Jiri Podpiera |
| Abstract: | The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics. |
| Keywords: | Disinflation;Europe;Euro Area;Inflation targeting;Open economies;Econometric models;Inflation, Central and Eastern Europe, Sweden, United Kingdom, Denmark |
| Date: | 2014–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/191&r=opm |
| By: | Konečný, Tomáš; Babecká Kucharčuková, Oxana |
| Abstract: | Various approaches have been employed to explore the possibility of non-linear feedback between the real and financial sector. The present study focuses on the impact of real shocks on selected financial sector indicators, and the responses of the real economy to impulses emanating from the financial sector. We estimate the threshold Bayesian VAR with block restrictions and the credit spread as a threshold variable using the example of the Czech Republic. We find that while there is no evidence of asymmetric effects across positive and negative shocks, the responses of the financial sector to real shocks tend to differ in low and high credit spread regimes. Responses in the opposite direction (i.e. from the financial sector to the real economy) are procyclical and similar irrespective of regime. A positive shock to credit and a negative shock to the NPL increase industrial production over the entire time horizon. The direct impact of foreign factors on lending seems to be rather limited. JEL Classification: E51, C15, C32 |
| Keywords: | credit, non-linearities, small open economy |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141730&r=opm |