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on Open Economy Macroeconomics |
| By: | Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University) |
| Abstract: | We offer a model of currency carry trades in which carry traders generate self-sustained excess returns if they coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. Such self-fulfilling pro table currency trades arise when the central bank of the target economy ignores the impact of carry-trade in flows on domestic asset prices, and responds only to their effect on inflation. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls. |
| Keywords: | Currency Carry Trades; Inflation Targeting; Financial Instability |
| JEL: | G01 G15 E58 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/6skkqt46r78qk9i6iliq48n6bm&r=opm |
| By: | Juan Carlos Hatchondo (Indiana University); Leonardo Martinez (IMF); Cesar Sosa-Padilla (McMaster University) |
| Abstract: | We measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects. We calibrate a baseline model with en- dogenous debt duration and default risk (in which debt can be diluted) using data from Spain. We find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost two years. Eliminating dilution also increases consumption volatility, but still produces welfare gains. The debt covenants we study could help enforcing fiscal rules |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2015012&r=opm |
| By: | Naoko Hara (Bank of Japan); Kazuhiro Hiraki (Bank of Japan); Yoshitaka Ichise (Bank of Japan) |
| Abstract: | This paper empirically explores recent changes in the exchange rate pass-through in Japan. We take a two-pronged approach. First, we estimate the exchange rate pass-through into domestic prices using time-varying parameter estimation. Second, we decompose the estimated exchange rate pass-through into the responsiveness of marginal costs to the exchange rate and the responsiveness of inflation to marginal costs. The estimation results show that the rates of exchange rate pass-through into the Producer Price Index and the Consumer Price Index have been increasing since the late 2000s. Evidence from international input-output tables suggests that the import-intensity of Japan's manufacturing sector has increased considerably over the last decade. We find that although the increasing dependence on imports in production (as well as in the retail sector) accounts for part of the rise in exchange rate pass-through, a larger part of the rise is due to greater responsiveness of inflation to marginal costs. This finding hints at a structural change in firms' pricing behavior since the late 2000s. |
| Keywords: | Exchange Rate Pass-Through; Phillips Curve; Time-Varying Parameter Estimation; Markov Chain Monte Carlo Estimation; International Input-Output Tables |
| JEL: | C11 E31 F41 |
| Date: | 2015–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp15e04&r=opm |
| By: | Demian, Calin-Vlad; di Mauro, Filippo |
| Abstract: | The elasticity of exports to exchange rate fluctuations has been the subject of a large literature without a clear consensus emerging. Using a novel sector level dataset based on firm level information, we show that exchange rate elasticities double in size when the country and sector specific firm productivity distribution is taken into account in empirical estimates. In addition, exports appear to be sensitive to appreciation episodes, but rather unaffected by depreciations. Finally, only rather large changes in the exchange rate appear to matter. JEL Classification: F14, F41, F31 |
| Keywords: | bilateral trade, exchange rate elasticity, productivity dispersion, TFP |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151801&r=opm |
| By: | Acemoglu, Daron; Autor, David; Dorn, David; Hanson, Gordon; Price, Brendan |
| Abstract: | Even before the Great Recession, U.S. employment growth was unimpressive. Between 2000 and 2007, the economy gave back the considerable employment gains achieved during the 1990s, with a historic contraction in manufacturing employment being a prime contributor to the slump. We estimate that import competition from China, which surged after 2000, was a major force behind both recent reductions in U.S. manufacturing employment and-through input-output linkages and other general equilibrium channels-weak overall U.S. job growth. Our central estimates suggest job losses from rising Chinese import competition over 1999 through 2011 in the range of 2.0 to 2.4 million. |
| Keywords: | labor demand; trade flows |
| JEL: | F16 J21 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10677&r=opm |
| By: | Soumya Suvra Bhadury (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research) |
| Abstract: | Money overtime has been deemphasized from most of the macroeconometric models of exchange rate making interest rate 'alone' the monetary policy instrument. One such model is Bjornland's (1999) Journal of International Economics and Monetary Policy and Exchange Rate Overshooting: Dornbusch was right after all. The model sets out to establish the empirical validity of Dornbusch exchange rate overshooting hypothesis for four small open economies. It does so though not with exact precision. When the same model is done using the correct econometric techniques, the impulse response functions for exchange rate due to a monetary policy shock are infact 'insignificant'. In this paper we revisit the Dornbusch exchange rate overshooting in a different model setting. A real money demand equations is added to the original model. Identification is achieved by imposing short-run and long-run restrictions while keeping the short-run interactions between the two variables monetary policy and exchange rate free. Classical neutrality of money is imposed according to which the monetary shocks are long-run neutral to certain real variables. Our paper rediscovers the validity of Dornbusch Overshooting hypothesis for Australia, Canada, Newzealand and Sweden when we compare it with Bjornland's model. More specifically, a contractionary monetary policy shock leads to exchange rate overshooting as predicted by Dornbusch. The exchange rate appreciates 'significantly' on impact to a monetary policy shock as shown by the impulse response functions and thereafter depreciates. Also the variance decomposition results justify our analysis by showing that money demand and money supply shocks explain siginificant portion of exchange rate fluctuations vis-a-vis Bjornland's original model. |
| Keywords: | Monetary Policy; Money Demand; Structural VAR; Short Run; Long Run; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle |
| JEL: | C32 E41 E51 E52 F31 F41 F47 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2015-017&r=opm |
| By: | Floreani, Vincent Arthur; Habib, Maurizio Michael |
| Abstract: | This paper investigates whether global investors are over or under exposed to- wards the euro area and the role of home bias and institutions at home in shaping this exposure. According to a simple benchmark from standard portfolio theory, euro area investors - in particular those from euro area low-rating economies - are overexposed to euro area securities. Instead, investors outside the EU are underexposed to euro area securities in their total portfolio, proportionally to their degree of home bias, but not in their foreign portfolio. Nevertheless, once we account for gravity factors, the largest foreign investors overweigh euro area securities, especially debt of euro area high rating economies. Crucially, this overexposure was resilient to the euro area crisis. Moreover, we show that institutions at home are important to explain exposure to euro area securities. In particular, the higher the standards of governance at home, the greater the exposure to the euro area debt. JEL Classification: E2, F3, G11, G15 |
| Keywords: | Cross-border portfolio holdings, home bias, institutions, international finance gravity model |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151799&r=opm |