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on Open Economy Macroeconomics |
| By: | Gopinath, Gita (Harvard University); Kalemli-Ozcan, Sebnem (University of Maryland); Karabarbounis, Loukas (Federal Reserve Bank of Minneapolis); Villegas-Sanchez, Carolina (ESADE - Universitat Ramon Llull) |
| Abstract: | Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway. |
| Keywords: | Misallocation; Productivity; Dispersion; Capital flows; Europe |
| JEL: | D24 E22 F41 O16 O47 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:728&r=all |
| By: | Lane, Philip R. |
| Abstract: | This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability. |
| Keywords: | EMU; financial stability; macroprudential |
| JEL: | E50 F30 F32 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10776&r=all |
| By: | Crowley, Patrick (Texas A&M University - Corpus Christi); Trombley, Christopher (Texas A&M University - Corpus Christi) |
| Abstract: | Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample. |
| Keywords: | business cycles; growth cycles; frequency domain; optimal currency area; macroeconomic synchronization; monetary policy; single currency |
| JEL: | C49 E32 F44 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2015_011&r=all |
| By: | Andreasen, Eugenia (University of Santiago of Chile); Schindler, Martin (Joint Vienna Institute); Valenzuela, Patricio (University of Chile) |
| Abstract: | Using a novel panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we find that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads. By contrast, we find no robust significant effect of restrictions on outflows. The effect of capital account restrictions on inflows is particularly strong for bonds maturing in the short-term, issued by small firms and in countries with underdeveloped financial markets. Additionally, the paper shows that capital account restrictions on inflows have a greater effect during periods of financial distress than during periods of financial stability. These results are suggestive of a causal interpretation of the estimated effects and establish a novel channel through which capital controls affect economic outcomes. |
| JEL: | F30 F40 G10 G30 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:upafin:15-02&r=all |
| By: | Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University) |
| Abstract: | We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management. |
| Keywords: | monetary policy rules, exchange rate management, interest rate smoothing, distributional effects, emerging markets, financial frictions, inflation targeting |
| JEL: | E25 E52 E58 F41 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9272&r=all |
| By: | Douglas L. Campbell (New Economic School (NES)) |
| Abstract: | Commonly used trade-weighted real exchange rate indices are computed as indices-of-indices, and thus do not adequately account for growth in trade with developing countries. Weighted Average Relative Price (WARP) indices solve this problem but do not control for productivity differences, as developing countries are observed to have lower price levels via the Penn Effect. I remedy these problems in two ways. First I propose a Penn Effect productivity adjustment to Weighted Average Relative Price indices (P-WARP). Secondly, I introduce a Weighted Average Relative Unit Labor Cost index (WARULC) for manufacturing and show that this measure does a much better job predicting trade imbalances and declines in manufacturing employment than the IMF’s Relative ULC measure created as an index-of-indices. The new series reveal that for many countries currently mired in liquidity traps, relative prices reached historic highs heading into the financial crisis of 2008. I document that in 2002 – during the surprisingly sudden collapse in US manufacturing – US relative prices had not been that high relative to trading partners since the worst year of the Great Depression. |
| Keywords: | Real Exchange Rate Indices, Relative Unit Labor Cost Indices, Weighted Average Relative Prices, Balassa-Samuelson, Trading Partner Substitution Bias |
| JEL: | F10 F31 N70 C43 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0216&r=all |
| By: | Paulo Júlio; Ricardo Mourinho Félix; Gabriela Lopes de Castro; José R. Maria |
| Abstract: | We define "financial fragmentation shocks" as fluctuations in credit market frictions in a small euro area economy. The shock changes the financial integration status quo of the monetary union, given its negligible international spillover. An increase in credit market frictions triggers a recession in the small economy. Perfect competition and the absence of nominal rigidities attenuate output volatility. Expectations also matter: real impacts weaken when long fragmentation time spans are perceived to be short lived. Contrarily to ""risk shocks", defined as fluctuations in borrowers' riskiness, fragmentation shocks do not imply strongly countercyclical bankruptcy rates. The results are based on PESSOA, a general equilibrium model with a Bernanke-Gertler-Gilchrist financial accelerator mechanism. |
| JEL: | E27 E44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201508&r=all |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Abhijit Sen Gupta (Asian Development Bank) |
| Abstract: | In this paper we investigate the different nuances of India's capital account management through empirical analyses as well as descriptive discussions. In particular we study the evolution of the capital control regime in India since 1991, and explore the rationale behind liberalizing certain flows restricting others and the means employed to do so. Increased integration with global financial markets has amplified the complexity of macroeconomic management in India. We analyze the trade-offs faced by Indian policy makers between exchange rate stability, monetary autnomy and capital account opnenness, within the framework of the well-known Impossible Trinity or Trilemma and find that over time India has adopted an intermediate regime balancing the different policy objectives while at the same time accumulating massive international reserves. We also calculate the exchange market pressure (EMP) index in India, and track its evolution over the last couple of decades. We evaluate the extent to which the EMP index has been influenced by major macroeconomic factors and find that a deteriorating trade balance and decline in portfolio equity inflows are associated with a higher EMP while positive changes in stock market returns lower the EMP. |
| Keywords: | Capital controls, Macroeconomic trilemma, Financial integration, Foreign exchange intervention, Sterilization, Exchange market pressure, Reserve adequacy |
| JEL: | E4 E5 F3 F4 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2015-024&r=all |
| By: | Zhang, Zhibai; Bian, Zhicun |
| Abstract: | Different from popular studies that focus on relative purchasing power parity, we study absolute purchasing power parity (APPP) in 21 main industrial countries. Three databases are used. Both the whole period and the sub-period are analyzed. The empirical proof shows that the phenomenon that APPP holds is common, and the phenomenon that APPP does not hold is also common. In addition, some country pairs and the pooled country data indicate that the nearer the GDPPs of two countries are, the more valid APPP between the two countries is. |
| Keywords: | Absolute purchasing power parity; Real exchange rate; Coefficient restriction test |
| JEL: | F3 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66241&r=all |
| By: | Nafis, Sadat |
| Abstract: | In the current state of the economy, securities and trade flows between countries exist fluently, however, such channels of flow do not completely map one-to-one without some attenuation, thereby preventing the notion of complete financial markets. This paper develops the econometric framework to identify the parameter which measures the degree of (imperfect) international risk-sharing, and employs nonlinear econometric methods to estimate for the values of the parameter across European countries. Our findings show how simple econometric methods can give a sensible measure of this risk-sharing, which can be used as a basis for economic model calibrations when solving DSGE models. Moreover, this paper lays the groundwork for the possibility of implementing further sophisticated nonlinear estimations to improve upon the measures already computed. |
| Keywords: | Macroeconomics, monetary economics, nonlinear econometrics |
| JEL: | C5 E00 |
| Date: | 2015–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66283&r=all |
| By: | Christophe Tavéra (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Jean-Sébastien Pentecôte (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Isabelle Cadoret-David (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Arthur Charpentier (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Chantal Guéguen (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Maryline Huchet-Bourdon (Agrocampus Ouest UMR 1302 - SMART - Structures et Marché Agricoles, Ressources et Territoires - Institut national de la recherche agronomique (INRA) - Agrocampus Ouest); Julien Licheron (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Guillaume L'Oeillet (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Nathalie Payelle (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1); Sébastien Pommier (CREM - Centre de Recherche en Economie et Management - CNRS - Université de Caen Basse-Normandie - UR1 - Université de Rennes 1) |
| Abstract: | This paper provides a meta-analysis of 1651 point estimates of Feldstein and Horioka saving retention coefficient from 49 peer-reviewed papers published over three decades. We get two main results. First, correcting for publication bias, we find a consistent underlying coefficient lying between 0.56 and 0.67 for studies using the original paper. Second, heterogeneity reported in the estimates of the Feldstein and Horioka can be explained by a few main factors. In particular, we find evidence that the saving retention coefficient is systematically underestimated with models written in first difference, models using the saving ratio or the current account ratio as the dependent variable instead of the investment ratio, and models including indicators of the public deficit or indicators of the country size as additional explanatory variables. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01112088&r=all |
| By: | Bjarni G. Einarsson; Kristófer Gunnlaugsson; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson |
| Abstract: | Iceland suffered a severe financial crisis in 2008 which can only be described as the perfect storm, with the currency falling by more than 50% and over 90% of the domestic financial system collapsing. What followed was a deep recession. This was not the first financial crisis experienced in Iceland, however. In fact, over a period spanning almost one and a half century (1875-2013), we identify over twenty instances of financial crises of different types. Recognising that crises tend to come in clusters, we identify six serious multiple financial crisis episodes occurring every fifteen years on average. These episodes seem to share many commonalities and the tragic but universal truth that “we’ve been there before” when it comes to financial crises really becomes all too clear. We find that these episodes usually involve a large collapse in domestic demand that in most cases serves as a trigger for theensuing crisis. What typically follows is a currency crisis, sometimes coinciding with a sudden stop of capital inflows and an inflation crisis, and most often a banking crisis. In line with international evidence, we find that contractions coinciding with these large financial crises tend to be both deeper and longer than regular business cycle downturns. Although the crisis episodes share many common elements, each one of them is also different to some extent. We are therefore not able to find financial variables that consistently provide an early-warning signal of an upcoming financial crisis across all the six episodes. However, we find that some key macroeconomic variables give a somewhat more robust signal. Our results also suggest that five of the six multiple crisis episodes coincide with a global financial crisis of some type, and that the most serious global episodes coincide with a twoto threefold increase in the probability of a financial crisis in Iceland. A companion paper (Part II) extends our analysis of the Icelandic financial boom-bust cycle to identifying financial cycles in our long data set, i.e. cycles that are of lower frequency and last longer than common business cycles and are characterised by co-movement of many key financial variables and often have peaks closely associated with financial crises. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp68&r=all |