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on Open Economy Macroeconomics |
| By: | Küçük, Hande; Sutherland, Alan |
| Abstract: | This paper aims to account for the Backus-Smith puzzle in a two-country DSGE model with endogenous portfolio choice in bonds and equities. Utility is non-separable across consumption and leisure and across time. This model is shown to imply almost zero correlation between relative consumption and the real exchange rate while generating portfolio positions that broadly match the data. Furthermore, the cross-country correlation of consumption is lower than the correlation of output, which has previously been a difficult fact to match. Non-separable preferences are found to be crucial to generating these results but financial market structure plays only a minor role. |
| Keywords: | Backus-Smith puzzle; consumption-real exchange rate anomaly; incomplete markets; international risk sharing; non-separable preferences; portfolio choice |
| JEL: | F31 F41 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10724&r=opm |
| By: | Carmen M. Reinhart; Miguel Angel Santos |
| Abstract: | Recent work has supported that there is a connection between the level of domestic debt level and sovereign default on external debt. We examine the potential linkages in a case study of Venezuela from 1984 to 2013. This unique example encompasses multiple financial crises, cycles of liberalization and policy reversals, and alternative exchange rate arrangements. This experience reveals a nexus among domestic debt, financial repression, and external vulnerability. Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. Using a variety of methodologies, we estimate the magnitude of the tax from financial repression. On average, this financial repression tax (as a share of GDP) is similar to those of OECD economies, in spite of the much higher domestic debt-to-GDP ratios in the latter. However, the financial repression “tax rate” is significantly higher in years of exchange controls and legislated interest rate ceilings. In line with earlier literature on capital controls, our comprehensive measures of capital flight document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to the Venezuelan case. |
| JEL: | E4 E5 E58 E6 F31 F36 N26 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21333&r=opm |
| By: | Blanchard, Olivier J; Erceg, Christopher; Lindé, Jesper |
| Abstract: | We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP. |
| Keywords: | currency union; DSGE model; fiscal policy; liquidity trap; monetary policy; zero bound constraint |
| JEL: | E52 E58 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10716&r=opm |
| By: | Anthony Landry (University of Pennsylvania) |
| Abstract: | Recent research emphasizes the central role played by large firms with multiple products, both within country (Midrigan (2011), Bernard et al. (2011)) and in dominating international trade (Eaton et al. (2012)). In this paper, we shed light on the way in which a large multinational retailer operates in a setting characterized by multiple products distributed and prices in many countries. Using a novel dataset of products advertized in IKEA catalogs from seven countries between 2002 and 2015, we find that 1. Price spell lengths differ considerably across countries, 2. Price adjustments are not synchronized across countries, and 3. Price adjustment only slightly reduces law-of-one-price deviations. Then, we develop and test a partial equilibrium model of multinational pricing with variable markups. Using actual exchange rate data to simulate the model, we find that the calibration that works best implies persistent marginal costs and relatively stable markups: The model fails to replicate finding #1 and #2 if marginal costs are more volatile than exchange rates or if markups are too volatile. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:265&r=opm |
| By: | Bergin, Paul R; Corsetti, Giancarlo |
| Abstract: | Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage. We develop a two-country New-Keynesian model allowing for two tradable sectors in each country: while one sector is perfectly competitive, firms in the other sector produce differentiated goods under monopolistic competition subject to sunk entry costs and nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing markups, monetary policy can foster the competitiveness of these firms, encouraging investment and entry in the differentiated goods sector, and ultimately affecting the composition of domestic output and exports. Panel regressions based on worldwide exports to the U.S. by sector lend empirical support to the theory. Constraining monetary policy with an exchange rate peg lowers a country’s share of differentiated goods in exports between 4 and 12 percent. |
| Keywords: | firm entry; monetary policy; optimal tariff; production location externality |
| JEL: | F41 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10718&r=opm |
| By: | Gregory Phelan (Williams College); Alexis Akira Toda (University of California-San Diego) |
| Abstract: | We study the effect of collateralized lending and securitization on international capital flows, growth, and welfare in a two country general equilibrium model. We find that capital flows from the high- to low-margin country, leading to high investment levels and economic growth in the latter. Despite low growth, the high-margin country substantially gains in terms of welfare through better risk sharing opportunities. The ability to tranche asset-backed securities in one country leads to offsetting portfolio flows, creating gross financial flows. Exogenous fluctuations in collateral requirements and the introduction of tranching have important implications for both net and gross international flows. |
| Keywords: | Asset-backed securities, current account deficit, global imbalances, gross international asset positions, idiosyncratic risk |
| JEL: | D52 F32 F34 F36 G15 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2015-14&r=opm |
| By: | Lucas Herrenbrueck (Simon Fraser University) |
| Abstract: | This paper is the first to describe a monetary general equilibrium model that features; (i) search frictions in the goods market, which create market power; (ii) endogenously chosen search effort by consumers, which mitigates this market power; (iii) heterogeneous firms and free entry; and (iv) an open economy, i.e. an arbitrary number of countries that trade goods and, potentially, assets. The model is flexible and well suited to studying questions in international macroeconomics, including the effects of monetary policy on production, firm entry, markups, trade, and welfare, at home or abroad. As part of this effort, I characterize a general class of matching processes which provide a novel approach to modeling firm sales: the number of customers per firm follows a bounded Pareto distribution with shape parameter less than or equal to one. |
| Keywords: | Monetary policy, optimal inflation, search frictions, search effort, price dispersion, open economy |
| JEL: | D43 E40 F12 |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp15-06&r=opm |
| By: | Jared C. Carbone (Division of Economics and Business, Colorado School of Mines); Kenneth J. McKenzie (Department of Economics, University of Calgary) |
| Abstract: | We examine the steady-state impact of a 10 percent reduction in the price of oil using a CGE model of the Canadian economy. The model includes a high degree of disaggregation at both the sectoral and provincial level, international and interprovincial flows of goods and services, labour which is mobile between sectors, capital which is partly mobile both inter-provincially and inter-sectorally, and equilibrium exchange rate adjustments arising from the oil price shock. The key result of our simulations is that--on balance--a negative oil price shock leaves Canadians worse off. We also find that the welfare losses associated with a negative oil price shock are shared broadly across the provinces. The corollary, of course, is that a positive price shock leaves Canadians better off. Our results have implications for the presence (or significance) of Dutch Disease in Canada; we argue that the "disease" is just one of a number of effects generated by oil-price changes. |
| Keywords: | resource curse, dutch disease, petroleum markets, Canada, computable general equilibrium |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:mns:wpaper:wp201507&r=opm |
| By: | Jesse Schreger (Harvard University) |
| Abstract: | We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. Because the legal rulings affected the probability of Argentina defaulting on its debt, independent of underlying economic conditions, these rulings allow us to study the effect of default on firm performance. Using both standard event study methods and a Rigobon (2003) heteroskedasticity-based identification strategy, we find that an increase in the probability of sovereign default causes a decline in the Argentine equity market. A 1% increase in the risk-neutral probability of default causes a 0.55% fall in an index of Argentine American Depository Receipts (ADRs). Extrapolating from these estimates, we conclude that the recent Argentine sovereign default episode caused a cumulative 33% drop in the ADR index from 2011 to 2014. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:240&r=opm |