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on Open Economy Macroeconomics |
| By: | Sami Alpanda ; Serdar Kabaca |
| Abstract: | This paper evaluates the international spillover effects of large-scale asset purchases(LSAPs) using a two-country dynamic stochastic general-equilibrium model with nominal and real rigidities, and portfolio balance effects. Portfolio balance effects arise from imperfect substitution between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs lower both domestic and foreign long-term yields, and stimulate economic activity in both countries. International spillover effects become larger as the steady-state share of long-term U.S. bond holdings increases in the rest-of-the-world portfolio, as the elasticity of substitution between short- and long-term bonds decreases, or as the elasticity of substitution between domestic and foreign bonds increases. We also find that U.S. asset purchases that generate the same output effect as U.S. conventional monetary policy have larger international spillover effects. This is because portfolio balance effects appear to be stronger under unconventional policy, and foreigners’ U.S. bond holdings are heavily weighted toward long-term bonds. |
| Keywords: | International topics; Transmission of monetary policy; Economic models |
| JEL: | E52 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-2&r=opm |
| By: | António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal ); João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal ); Adelaide Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal ) |
| Abstract: | One of the main implications of the basic target zone model developed by Krugman (1991) is that there is a trade-off between exchange rate volatility and interest rate differential volatility. Using an M-GARCH model we find evidence that such a trade-off existed, prior to the introduction of the euro, between the exchange rate and the interest rate differential among Portugal and Germany. This result reflects the increased credibility of the Portuguese monetary policy, due mainly to the modernisation of the banking and financial system and to the progress made in the disinflation process under an exchange rate target zone. |
| Keywords: | Credibility, disinflation, M-GARCH, volatility and target zones. |
| JEL: | C32 C51 F31 F41 G15 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2015-01.&r=opm |
| By: | Guillermo Escudé (Central Bank of Argentina ) |
| Abstract: | A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions. |
| Keywords: | DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy |
| JEL: | E58 O24 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:201462&r=opm |
| By: | Vitor Constancio (European Central Bank ) |
| Abstract: | The paper aims to provide a deep rationale for banking union in the Euro Area. It shows that the banking sectors of core and peripheral countries were responsible for financing the credit boom that created the imbalances and vulnerabilities that later were at the centre of the crisis. The increase of debt ratios in the periphery until 2007 was more significant for the private sector than for the public sector. The crisis has been as much a banking crisis as a sovereign debt crisis and to avoid similar future risks a European Supervisor and a Resolution Authority are essential. |
| Keywords: | European crisis; banking union; fiscal and macroeconomic imbalances |
| JEL: | H63 E52 F36 G01 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:spaper:15&r=opm |
| By: | Rabah Arezki ; Valerie A. Ramey ; Liugang Sheng |
| Abstract: | This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output–the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time. |
| JEL: | E00 F32 F41 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20857&r=opm |
| By: | Kieran Walsh (Yale ) |
| Abstract: | What are the determinants and economic consequences of cross-border asset positions? I develop a new quantitative portfolio choice model and apply it to emerging market international finance. The model allows for partial default and accommodates trade in a rich set of assets. The latter means I am able to draw distinctions both between debt and equity finance and between gross and net debt. The main contribution is in developing portfolio choice techniques to analyze capital flows and default in an international finance context. I calibrate the pricing kernel of the model to match properties of U.S. stock returns and yield curves. I then analyze optimal emerging market portfolio and default behavior in response to realistic international financial fluctuations. My calibrated model jointly captures four empirical regularities that have been difficult to produce in the quantitative international finance literature: (1) Gross capital inflow and outflow are pro-cyclical. My model generates this as well as pro-cyclicality in equity liabilities and short-term debt. This is important because recent empirical work emphasizes that the level and composition of gross capital flows are at least as important as current accounts in understanding risk and predicting crises. (2) Most external defaults are partial. (3) Levels of gross external debt in excess of 50% of GNI are common. (4) Usually, borrowers default in bad economic times. Additionally, I provide novel characterizations for stochastic, infinite horizon portfolio problems with partial default. These results allow me to rapidly compute the consumption/portfolio problem solution, even with many assets and default, and they yield two key propositions: (i) for any degree of growth persistence, default increases as market conditions deteriorate, consistent with Regularity (4), and (ii) debt increases with the maturity length of bonds. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:789&r=opm |
| By: | Ken Miyajima ; Madhusudan Mohanty ; James Yetman |
| Abstract: | This paper reviews the role of long-term interest rates in international monetary transmission and related policy challenges in the wake of exceptionally easy US monetary policy. It employs a panel VAR model to examine the impact of a very low US term premium on relatively small open Asian economies. The results show that unconventional US monetary policy spills over to Asia mainly through low domestic bond yields and rapid growth of domestic bank credit. Financial integration does not appear to reduce the control of national monetary authorities over short-term policy rates. However, it does compromise control over long-term rates that are key determinants of economic activity. In light of the results, the paper reviews potential policy options to deal with volatile term and risk premiums. |
| Keywords: | Asian economies, international monetary transmission, long term interest rates, monetary policy, risk premium |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:478&r=opm |
| By: | Kiptui, Moses |
| Abstract: | The purpose of this study is to determine the factors contributing to real exchange rate fluctuations in Kenya; whether the real exchange rate responds more to real or to nominal shocks. A vector autoregression framework is applied in the analysis yielding impulse responses and decompositions of the forecast error variance. The results demonstrate the important role played by real shocks in causing exchange rate fluctuations, in particular highlighting the predominant role played by demand shocks. It is also shown that shocks hitting the Kenyan economy are asymmetric to shocks affecting the US economy. Thus, the Kenyan economy is buffeted by idiosyncratic shocks which are more country specific. Consequently, it can be argued that the exchange rate plays an important role as a shocks absorber in the Kenyan context. |
| Keywords: | Real and Nominal shocks, exchange rates, vector autoregressions, Kenya |
| JEL: | C32 E31 F31 F42 |
| Date: | 2015–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61515&r=opm |
| By: | Gabriel Fagan (Institute for International Integration Studies, Trinity College Dublin ); Paul McNelis (Graduate School of Business Administration, Fordham University, New York ) |
| Abstract: | This paper examines how membership of a monetary union affects macroeconomic adjustment of Euro Area countries to sudden stops.We focus on a key difference between a standard peg and a monetary union: the availability of external financing from the common centralbank via the TARGET system. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bankfinancing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates thecollapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However,a welfare analysis shows that TARGET financing only results in modest welfare gains in the affected country, since it exacerbates thetendency towards over-borrowing, leading to an increased incidence of sudden stop episodes.Length: 68 pages |
| Keywords: | Sudden stops, Target Balances, European Monetary Union |
| JEL: | E52 E62 F41 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp465&r=opm |
| By: | Wright, Nicholas Anthony |
| Abstract: | This paper examines two measures of the equilibrium real exchange rate using the Macroeconomic Balance (MB) and the Natural Real Exchange Rate (NATREX) approaches. Unlike previous studies, this study controls for business cycle effects and the debt sustainability position of countries on the current account, while providing a more comprehensive measure of relative productivity. A longitudinal panel econometric technique is utilized on a set of countries from the Western Hemisphere. These countries operate a managed float exchange rate system; have similar output per capita and equivalent levels of openness. The findings suggest that there were several intervals of exchange rate misalignment for each country, including Jamaica, over the 1990-2010 study period. The exchange rate misalignment series was found to be stationary which is an indication that there is a long-run equilibrium mean and a constant variance for exchange rate misalignment. This long-run misalignment mean is assumed to be zero by economic theory. The Autoregressive Distributive Lag (ARDL) error correction model suggests that disequilibrium in the exchange rate is adjusted by 46.2 per cent each year and the half-life deviation formula suggests that a half of the deviation in the exchange rate is corrected after 1.1 years for each country in the panel. |
| Keywords: | Macro-balance approach, NATREX, Current Account Misalignment, Real Effective Exchange Rates, Exchange Rate Misalignment, Trade. |
| JEL: | F14 F31 F32 F37 F41 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61170&r=opm |
| By: | Takashi Kano ; Hiroshi Morita |
| Abstract: | The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is its near random-walk behavior sharing a common stochastic trend with the monetary base differential, which is augmented by the excess reserves, between Japan and the United States. In this paper, we develop a simple two-country incomplete-market model equipped with a specification of domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent I(1) component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate. |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e79&r=opm |
| By: | Domenico Ferraro ; Ken Rogoff ; Barbara Rossi |
| Abstract: | We show the existence of a very short-term relationship at the daily frequency between changes in the price of a country's major commodity export price and changes in its nominal exchange rate. The relationship appears to be robust and to hold when we use contemporaneous (realized) commodity price changes in our regression. However, when we use lagged commodity price changes, the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account. |
| JEL: | F31 F37 C22 C53 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1461&r=opm |
| By: | Blaise Gadanecz ; Ken Miyajima ; Chang Shu |
| Abstract: | In this paper we consider the role of exchange rate risk in influencing local currency sovereign bond yields in emerging market economies (EMEs). We explicitly account for exchange rate expectations and uncertainty around them, as measured by exchange rate volatility. The analysis points to an important influence of exchange rate risk: when exchange rate volatility increases, investors require a larger yield compensation for holding EME local currency sovereign bonds. The impact of exchange rate volatility has become more important since May 2013, when investors realised that the Federal Reserve may reduce the scale of its asset purchases sooner than previously expected. |
| Keywords: | emerging markets, exchange rate risk, local currency sovereign bond yields |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:474&r=opm |