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on Open Economy Macroeconomics |
| By: | Alan J. Auerbach; Yuriy Gorodnichenko |
| Abstract: | While theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have been stubbornly finding depreciation. Using daily data on U.S. defense spending (announced and actual payments), we document that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. We examine responses of other variables at the daily frequency and explore how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times. |
| JEL: | E62 F41 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21100&r=opm |
| By: | Eylem Ersal Kiziler (Department of Economics, University of Wisconsin - Whitewater); Ha Nguyen (Development Research Group, World Bank) |
| Abstract: | Since the start of the Eurozone, the pattern of debt ows to Peripheral Europe seems puzzling: they were mostly indirect and intermediated by the large countries of the euro area. This paper examines the euro currency risk and the business cycle risk as two opposing forces: while the currency risk favors Core Europe in lending to Peripheral Europe, business cycle risk favors outsider lenders. We explain the mechanisms and show that both forces are strong. In a 3-country DSGE model with endogenous portfolio choices, without the business cycle risk, currency risk completely pushes outside lenders out of the Peripheral bond market. With both types of risk, Core Europe and outside lenders hold 40 and 60 percents of Peripheral bonds respectively. The results suggest that other factors such as asymmetric information or bailout discrimination are also at play. |
| Keywords: | Debt Flows, Business Cycle Risk |
| JEL: | F4 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:uww:wpaper:14-03&r=opm |
| By: | Stephen McKnight (El Colegio de México); Laura Povoledo (University of the West of England, Bristol) |
| Abstract: | We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. We find that a combination of productivity and sunspot shocks can account for the observed counter-cyclical behavior in international relative prices and quantities, while simultaneously generating volatilities that match the data. The indeterminacy model can also resolve the Backus-Smith puzzle without requiring a low value of the trade elasticity. |
| Keywords: | Indeterminacy; Sunspots; International Business Cycles; Net Exports; Terms of Trade; Real Exchange Rate; Backus-Smith Puzzle |
| JEL: | E32 F41 F44 |
| Date: | 2015–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:20151504&r=opm |
| By: | Peter Benczur (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and European Commission, Joint Research Centre (JRC) Central European University); Istvan Konya (Institute of Economics Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Central European University) |
| Abstract: | We study the adjustment process of a small open economy to a sudden worsening of external conditions. To model the sudden stop, we use a highly non-linear specification that captures credit constraints in a convenient way. The advantage of our approach is that the effects of the shock become highly conditional on the external debt position of the economy. We adopt a two-sector model with money-in-the-utility, which allows us to study sectoral asymmetries in the adjustment process, and also the role of currency mismatch. We calibrate the model to the behavior of the Hungarian economy in the 2000s and its crisis experience in 2008-11 in particular. We also calculate four counterfactuals: two with different exchange rate policies (a more flexible float and a perfect peg), and then these two policy regimes with smaller initial indebtedness. Overall, our model is able to fit movements of key aggregate and sectoral macroeconomic variables after the crisis by producing a large and protracted deleveraging process. It also offers a meaningful quantification of the policy tradeoff between facilitating the real adjustment by letting the currency depreciate and protecting consumption expenditures by limiting the adverse effect of exchange rate movements on household balance sheets. |
| Keywords: | interest premium, sudden stop, small open economy |
| JEL: | E21 E41 E5 F3 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1505&r=opm |
| By: | Na, Seunghoon (Columbia University); Schmitt-Grohe, Stephanie (Columbia University, CEPR, and NBER); Uribe, Martin (Columbia University and NBER); Yue, Vivian Z. (Emory University and Federal Reserve Bank of Atlanta) |
| Abstract: | This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages, thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. In contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates. |
| Keywords: | sovereign default; exchange rates; optimal monetary policy; capital controls; downward nominal wage rigidity; currency pegs |
| JEL: | E43 E52 F31 F34 F41 |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedacq:2015-01&r=opm |
| By: | Mariarosaria Comunale (Bank of Lithuania) |
| Abstract: | Exchange rate assessment is becoming increasingly relevant for economic surveillance in the European Union (EU). The persistence of different wage, price and productivity dynamics among the Economic and Monetary Union (EMU) countries or EU members with a fixed exchange regime with the euro, coupled with the impossibility of correcting competitiveness differentials via the adjustment of nominal rates, have resulted in divergent dynamics in Real Effective Exchange Rates. This paper explores the role of economic fundamentals, included in the transfer effect theory, in explaining medium/long-run movements in the Real Effective Exchange Rates in the EU over the period 1994–2012 by using heterogeneous, co-integrated panel frameworks in static and dynamic terms. In addition, the paper provides an analysis of the misalignments of the rate for each member state based on the “equilibrium” measure calculated from the permanent component of the fundamentals (the so-called Behavioural Effective Exchange Rate). We find that the coefficients of the determinants are extremely different across groups in magnitude and sometimes in sign as well and the transfer theory does not hold for periphery and the Central and Eastern European countries (CEECs). The relative importance of the transfer variable and the Balassa-Samuelson measure are crucial for the asymmetries. The resulting misalignments in EU28 are huge and the patterns diverge significantly across groups. The core countries have been undervalued for almost the whole period, which entails from an important increase in competitiveness for those countries. Instead the periphery has experienced high rates, especially in Portugal. In addition, the behaviour of CEECs is also driven, as expected, by the catching-up process and the criteria to the accession to the EU. The misalignments in this case are still extremely wide and reflect these phenomena. |
| Keywords: | real effective exchange rate, European Union, behavioural effective exchange rate, transfer problem, panel co-integration, exchange rate misalignments |
| JEL: | F31 C23 |
| Date: | 2015–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:18&r=opm |
| By: | Gilberto Gonz\'alez-Parra; Benito Chen-Charpentier; Abraham J. Arenas; Miguel Diaz-Rodriguez |
| Abstract: | This research deals with the mathematical modeling of the physical capital diffusion through the borders of the countries. The physical capital is considered an important variable for the economic growth of a country. Here we use an extension of the economic Solow model to describe how the smuggling affects the economic growth of the countries. In this study we rely on a production function that is non-concave instead of the classical Cobb-Douglas production function. In order to model the physical capital diffusion through the borders of the country, we developed a model based on a parabolic partial differential equation that describes the dynamics of physical capital and boundary conditions of Neumann type. Smuggling is present in many borders between countries and may include fuel, machinery and food. This smuggling through the borders is a problematic issue for the country's economies. The smuggling problem usually is related mainly to a non-official exchange rate that is different than the official rate or subsides. Numerical simulations are obtained using an explicit finite difference scheme that shows how the physical capital diffusion through the border of the countries. The study of physical capital is a paramount issue for the economic growth of many countries for the next years. The results show that the dynamics of the physical capital when boundary conditions of Neumann type are different than zero differ from the classical economic behavior observed in the classical spatial Solow model without physical capital flux through the borders of countries. Finally, it can be concluded that avoiding the smuggling through the frontiers is an important factor that affects the economic growth of the countries. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.04388&r=opm |
| By: | Enrico Perotti (University of Amsterdam, the Netherlands); Toni Ahnert (Bank of Canada, Canada) |
| Abstract: | Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increase lending into marginal projects. Because safety conscious foreigners escape any risk by running in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume. |
| Keywords: | capital flows, unstable funding, safe haven, absolute safety |
| JEL: | F3 G2 |
| Date: | 2015–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150036&r=opm |