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on Open Economy Macroeconomics |
| By: | Michael B. Devereux; Ben Tomlin; Wei Dong |
| Abstract: | This paper investigates the impact of market structure on the joint determination of exchange rate pass- through and currency of invoicing in international trade. A novel feature of the study is the focus on market share of firms on both sides of the market—that is, exporting firms and importing firms. A model of monopolistic competition with heterogeneous firms has the following set of predictions: a) exchange rate pass-through should be non-monotonic and U-shaped in the market share of exporting firms, but monotonically declining in the market share of importers; b) exchange rate pass-through should be lower, the higher is local currency invoicing of imports; and c) producer currency invoicing should be related non-monotonically and U-shaped to exporter market share, and monotonically declining in importing firms’ market share. We test these predictions using a new and large micro data set covering the universe of Canadian imports over a six-year period. The data strongly support all three predictions. |
| JEL: | F3 F4 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21413&r=opm |
| By: | Marcel Fratzscher (DIW Berlin, Humboldt-University Berlin and CEPR (E-mail: mfratzscher@diw.de)); Marco Lo Duca (European Central Bank (E-mail: marco.lo_duca@ecb.europa.eu)); Roland Straub (European Central Bank (E-mail: roland.straub@ecb.europa.eu)) |
| Abstract: | The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in lowering sovereign yields and raising equity markets, especially in the US relative to other countries. Fed measures since 2010 (QE2) boosted equities worldwide, while they had muted impact on yields across countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets. |
| Keywords: | monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data |
| JEL: | E52 E58 F32 F34 G11 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:15-e-07&r=opm |
| By: | Michael Bleaney; Mo Tian |
| Abstract: | Chinn and Wei (2013) show that the ratio of the current account balance to GDP is as persistent under floating rates as under pegged rates. This result contradicts economists’ widely held belief that current account imbalances should be corrected more quickly under floating. This belief consists of three elements: (a) imbalances will induce corrective real exchange rate movements; (b) real exchange rates move further under floating; and (c) larger real exchange rate movements will induce bigger shifts in the current account balance. It is shown that the data support (b) and (c) but not (a): the real effective exchange rate does not respond significantly to the current account balance. The results are robust to the choice of regime classification scheme, time variation of equilibrium values using a Hodrick-Prescott filter, and to recent regime switches. The implication is that the failure of real exchange rates to react as expected to current account imbalances is the main source of the puzzle. |
| Keywords: | current account, exchange rates, trade balance JEL codes: F31 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:not:notecp:15/05&r=opm |
| By: | Dräger, Lena; Proaño, Christian R. |
| Abstract: | Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modeled by letting the loanto-value (LTV) ratio that banks demand of entrepreneurs depend on either regional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context. |
| Keywords: | cross-border banking,euro area,monetary unions,DSGE,monetary policy |
| JEL: | F41 F34 E52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:212015&r=opm |
| By: | Kenneth James McKenzie (University of Calgary); Jared C. Carbone |
| 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. |
| Date: | 2015–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2015-15&r=opm |
| By: | Oeking, Anne; Zwick, Lina |
| Abstract: | Imbalances in the current and financial account have been at the heart of the discussion on global imbalances. With respect to monitoring macroeconomic stability it is highly important to know whether capital flows cause reactions in the current account or whether they rather adjust to changes in the current account, and hence which variable can be used as an indicator for upcoming imbalances. In this paper, we study the dynamics of the current account and different types of net capital flows (portfolio flows, direct investment and other investment flows) for selected OECD countries applying the concept of Granger-causality. Moreover, in a non-linear model we test whether the direction of Granger-causality changes over the business cycle. Our results show that the current account generally Granger-causes the financial account components. However, for short-term flows the direction changes over the business cylce: they seem to finance the current account during economic downturns, while inducing its changes during upturns. |
| Keywords: | Current Account,International Capital Flows,Granger-causality,Threshold VAR |
| JEL: | F32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:565&r=opm |
| By: | Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas) |
| Abstract: | I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler’s ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate. |
| JEL: | E58 F31 F33 F41 G15 |
| Date: | 2015–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:243&r=opm |
| By: | Philip Sauré (Swiss National Bank) |
| Abstract: | With its cost- and time-intensive research and development, the pharmaceutical sector can generate large trade imbalances. These imbalances may arise because investment and output occur in different years; they are sizable if pharmaceuticals account for a large and growing share of exports. Switzerland's recent trade surplus results from this effect, which also explains why the Swiss trade surplus is exceptionally resilient. The Swiss trade surplus is, therefore, a poor indicator for exchange rate assessments. |
| Keywords: | Trade imbalances, exchange rate elasticity, exchange rate assessment, R&D costs |
| JEL: | F10 F14 F41 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp15-11&r=opm |
| By: | Keiichi Morimoto (Department of Economics, Meisei University); Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Faculty of Economics and Business Administration, The University of Kitakyushu); Koichi Futagami (Graduate School of Economics, Osaka University) |
| Abstract: | In a small open economy model of endogenous growth with public capital accu- mulation, we examine the effects of a debt policy rule under which the government must reduce its debt-GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long run debt-GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low). |
| Keywords: | Fiscal policy, Public debt, Welfare, Small open economy, Indeterminacy, Limit cycles |
| JEL: | E62 H54 H63 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1307r&r=opm |