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on Open Economy Macroeconomics |
| By: | Guillermo Ordonez (University of Pennsylvania); Daniel Neuhann (University of Pennsylvania); Harold Cole (University of Pennsylvania) |
| Abstract: | What a country has done in the past, and what other countries are doing in the present can feedback for good or for ill. We develop a model which can address hysteresis and contagion in sovereign debt markets. When a country's fundamentals change, those changes affect information acquisition about that country but also affect the allocation of investors worldwide, inducing changes in risk spreads in seemingly unrelated countries. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1245&r=opm |
| By: | Kristin J. Forbes; Michael W. Klein |
| Abstract: | Countries choose different strategies when responding to crises. An important challenge in assessing the impact of these policies is selection bias with respect to relatively time-invariant country characteristics, as well as time-varying values of outcome variables and other policy choices. This paper addresses this challenge by using propensity-score matching to estimate how major reserve sales, large currency depreciations, substantial changes in policy interest rates, and increased controls on capital outflows affect real GDP growth, unemployment, and inflation during two periods marked by crises, 1997 to 2001 and 2007 to 2011. We find that none of these policies yield significant improvements in growth, unemployment, and inflation. Instead, a large increase in interest rates and new capital controls are estimated to cause a significant decline in GDP growth. Sharp currency depreciations may raise GDP growth over time, but only with a lagged effect and after an initial contraction. |
| JEL: | F41 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20987&r=opm |
| By: | Andrei A. Levchenko (University of Michigan and NBER); Nitya Pandalai-Nayar (University of Michigan) |
| Abstract: | We propose a novel identification scheme for a non-technology business cycle shock, that we label Òsentiment.Ó This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks -- surprise TFP, news of future TFP, and ÒsentimentÓ -- from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of short-run business cycle fluctuations in the US. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for up to 50% of the forecast error variance of Canadian GDP and about one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization. |
| Keywords: | Sentiments, Demand Shocks, News Shocks, International Business Cycles |
| JEL: | E32 F41 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:640&r=opm |
| By: | Eijffinger, Sylvester C W; Kobielarz, Michal L.; Uras, Rasim Burak |
| Abstract: | The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portuguese economy over the period of 1998 to 2012. |
| Keywords: | bail-out; contagion; interest rate spreads; sovereign debt crisis |
| JEL: | F33 F34 F36 F41 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10459&r=opm |
| By: | Galina V. Kolev |
| Abstract: | The paper analyzes the sources of exchange rate movements in emerging economies in the context of monetary tapering by the Federal Reserve. A structural vector autoregression framework with a long-run restriction is used to decompose the movements of nominal ex-change rates into two components: one component driven solely by the adjustment of the real exchange rate to permanent shocks and one resulting from transitory shocks such as monetary policy measures. Imposing the restriction that temporary shocks should not affect the real exchange rate in the long run, the analysis shows that the recent depreciation of the Russian ruble and the Turkish lira is largely driven by transitory shocks, like for instance monetary policy measures. Furthermore, the response of the lira to transitory shocks is sluggish and further depreciation is possible in the next months. In Brazil and India, on the contrary, nominal exchange rate behavior is mainly driven by permanent shocks. The recent depreciation is not caused by short-lived shocks but rather by changing long-term macroeconomic fundamentals. The foreign exchange interventions of the central bank to avoid large depreciation are therefore largely misplaced, especially in Brazil. They aggravate the use of nominal exchange rate flexibility as an efficient adjustment mechanism for real exchange rate changes, i.e. changes in relative prices across borders, and efficient allocation of resources. |
| Keywords: | Exchange rates, emerging economies, SVAR, monetary policy |
| JEL: | F31 E58 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2015:i:146&r=opm |
| By: | Andrés Fernández; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martín Uribe |
| Abstract: | We present and describe a new dataset of capital control restrictions on both inflows and outflows of ten categories of assets for 100 countries over the period 1995 to 2013. Building on the data first presented in Martin Schindler (2009), and other datasets based on the analysis of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions, this dataset includes additional asset categories, more countries, and a longer time period. We discuss the manner in which we translate the information in the AREAER into a usable data set. We also characterize the data with respect to the prevalence of controls across asset categories, the correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of our dataset with other indicators of capital controls. |
| JEL: | F3 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20970&r=opm |
| By: | Michael Bleaney; Mo Tian; Lin Yin |
| Abstract: | Several de facto exchange rate regime classifications have been widely used in empirical research, but they are known to disagree with one another to a disturbing extent. We dissect the algorithms employed and argue that they can be significantly improved. We implement the improvements, and show that there is a far higher agreement rate between the modified classifications. We conclude that the current pessimism about de facto exchange rate regime classification schemes is unwarranted. |
| Keywords: | exchange rate regimes, trade, volatility JEL codes: F31 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:not:notecp:15/01&r=opm |
| By: | Montecino, Juan Antonio (The University of Massachusetts at Amherst) |
| Abstract: | The consensus view is that capital controls can effectively lengthen the maturity composition of capital inflows and increase the independence of monetary policy but are not generally effective at reducing net inflows and influencing the real exchange rate. This paper presents empirical evidence that although capital controls may not directly affect the long-run equilibrium level of the real exchange rate, they may enable disequilibria to persist for an extended period of time relative to the absence of controls. Allowing the speed of adjustment to vary according to the intensity of restrictions on capital flows, it is shown that the real exchange rate converges to its long-run level at significantly slower rates in countries with capital controls. This result holds whether permanent or episodic controls are considered. The benchmark estimated half-lives for the speed of adjustment are around 3.5 years for countries with strict capital controls but as low as 2 years in countries with no restrictions on international capital flows. The paper also presents a stylized two-sector dynamic investment model with constraints on externally-funded investment to illustrate potential theoretical channels. |
| Keywords: | Capital Controls, Real Exchange Rates, Undervaluation. |
| JEL: | F2 F31 F36 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2015-02&r=opm |
| By: | Hiroaki Sasaki; Shinya Fujita |
| Abstract: | This study builds a two-country Kaleckian model and investigates the effect of one country’s economic policy on both countries. In contrast to preceding studies, we consider monetary aspects as well as real aspects. Our results show that the effects on output of an increase in the nominal wage rate and in the mark-up rate differ from the results obtained from one-country Kaleckian models. Moreover, we show that the success of monetary easing in one country may depend on the other country’s policy, implying the need for policy coordination between the two countries. |
| Keywords: | two-country Kaleckian model; income distribution; monetary policy |
| JEL: | E12 E41 E52 F31 F41 F42 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:kue:dpaper:e-14-017&r=opm |