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on Open Economy Macroeconomics |
| By: | Javier García-Cicco; Enrique Kawamura |
| Abstract: | This paper evaluates from a welfare perspective three policy alternatives for dealing with Dutch disease problems originating from cyclical movements in commodity prices: fiscal rules for government expenditures, capital controls, and taxes on domestic lending. A DSGE model of a small open economy is developed, with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The model is calibrated using Chilean data. For each policy tool, optimal simple rules are analyzed from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shapes the optimal policy design. A general conclusion of the analysis is that the included Dutch disease inefficiencies are of quantitatively limited relevance in analyzing the desirability of these policies from a welfare perspective. |
| Keywords: | Fiscal management, Policy evaluation, Fiscal Policy, Taxation, Government budget, Dutch Disease, Fiscal procyclicality, Fiscal rules, Capital controls, Macro-prudential policies |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:90216&r=all |
| By: | Georgiadis, Georgios |
| Abstract: | This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country’s trade and financial integration, de jure financial openness, exchange rate regime, financial market development, labor market rigidities, industry structure, and participation in global value chains. The role of these country characteristics for the spillovers often differs across advanced and non-advanced economies and also involves non-linearities. Furthermore, economies which experience larger spillovers from conventional US monetary policy also displayed larger downward revisions of their growth forecasts in spring 2013 when the Federal Reserve upset markets by discussing tapering off quantitative easing. The results of this paper suggest that policymakers could mitigate their economies’ vulnerability to US monetary policy by fostering trade integration as well as domestic financial market development, increasing the flexibility of exchange rates, and reducing frictions in labor markets. Other policies - such as inhibiting financial integration, industrialisation and participation in global value chains - might mitigate spillovers from US monetary policy, but are likely to reduce long-run growth. JEL Classification: F4, E5, C3 |
| Keywords: | Mixed cross-section global VAR, spillovers, US monetary policy |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151854&r=all |
| By: | Anton Korinek; Damiano Sandri |
| Abstract: | International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices. |
| Keywords: | Capital controls;Macroprudential policies and financial stability;Emerging markets;East Asia;Exchange rate depreciation;Borrowing;Domestic savings;Financial crises;Econometric models;Financial stability, pecuniary externalities, capital controls, macroprudential regulation, inequality. |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/218&r=all |
| By: | Pancrazi, Roberto (Department of Economics University of Warwick); Seoane, Hernan D (Department of Economics, Universidad Carlos III de Madrid,); Vukotic, Marija (Department of Economics University of Warwick) |
| Abstract: | In this paper we examine the impact of bailout policies in small open economies that are subject to financial frictions. We extend standard endogenous default models in two ways. First, we augment the government’s choice set with a bailout option. In addition to the standard choice of defaulting or repaying the debt, a government can also choose to ask for a third-party bailout, which comes at a cost of an imposed borrowing limit. Second, we introduce financial frictions and a financial intermediation channel, which tie conditions on the private credit market to the conditions on the sovereign credit market. This link has been very strong in European countries during the recent sovereign crisis. We find that the existence of a bailout option reduces sovereign spreads and, through the described link, private credit rates as well. The implementation of a rescue program reduces output losses and increases welfare, measured in consumption equivalent terms. Moreover, bailout benefits emerge even when a government only has the option of asking for a bailout, but does not take advantage of it. |
| Keywords: | Default ; Sovereign Spread ; Private Spread ; Bailouts |
| JEL: | E44 F32 F34 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1069&r=all |
| By: | Hernández Marco A. |
| Abstract: | This paper evaluates whether a macroeconomic trade model, where the decision of trade and the Balassa-Samuelson effect are endogenous, can explain recent empirical facts about the importance of nontraded goods prices in real exchange rate variations better than a standard Balassa-Samuelson model, where nontraded goods are exogenously determined. The model is modified and calibrated to an asymmetric equilibrium that allows the steady state of the model to match some of the US-Mexico relationships quite well. The results suggest an importance of nontraded goods in real exchange rate volatility closer to the empirical evidence. In addition, the model replicates the findings that nontraded prices exhibit higher volatility than the real exchange rate and that these prices are negatively correlated with traded goods prices. |
| Keywords: | Real Exchange Rate; Endogenous Trade; Firm Heterogeneity; Firm Dynamics |
| JEL: | F12 F31 F41 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2015-07&r=all |
| By: | Alan Gelb, Anna Diofasi |
| Abstract: | In an effort to provide a better understanding of the large variation in price levels between countries, we report on a cross-country analysis of national price levels, using Purchasing Power Parity (PPP) data on 168 economies from the most recent 2011 round of the International Comparison Program (ICP). PPPs are used for many purposes, including to set international poverty lines and allocate IMF quotas. The well-known Balassa-Samuelson income effect is not the only factor affecting PPPs, particularly for low- and middle income countries. Structural and policy factors make a difference. Small island states are relatively costly for their income level as are sparsely populated countries. Countries with large subsidy programs – as measured by fuel subsidies – tend to have lower price levels than predicted on the basis of income. More open labor policies – as measured by a higher share of migrants in the labor force – are associated with lower price levels in higher-income countries. The proposition that very poor governance is associated with both low income and high prices receives some modest support. Aid inflows and a negative current account balance are correlated with higher price levels (the latter less strongly), but FDI and remittances are not. We also observe a strong association between inequality and higher price levels, which provides some support for the proposition that the ICP may over-weight globally comparable goods. Our results confirm the tendency for African countries to be more expensive than countries with similar incomes in other parts of the world. We fail to fully explain this phenomenon but offer a number of explanations that together could account for it, including low agricultural productivity. Finally, we confirm the relationship between low PPP price levels and greater competitiveness in manufactures, especially for low and middle-income countries. |
| Keywords: | purchasing power parity, price level, competitiveness, International Comparison Program, sub-Saharan Africa |
| JEL: | E31 O47 R32 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:416&r=all |
| By: | Rabah Arezki; Valerie A Ramey; Liugang Sheng |
| Abstract: | This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ? the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time. |
| Keywords: | Oil sector;External shocks;Oil production;Current account;Open economies;oil, news shocks, current account and business cycles |
| Date: | 2015–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/209&r=all |
| By: | Harashima, Taiji |
| Abstract: | Under floating exchange rates, there is a mechanism that generates persistent current account imbalances at a competitively achieved steady state. Even if preferences are heterogeneous, sustainable heterogeneity in which all optimality conditions of all heterogeneous households are satisfied can be achieved if relatively advantaged households do not behave unilaterally. Even if households of a relatively advantaged country behave unilaterally, households in less advantaged countries can counter the unilateral behavior under floating exchange rates and achieve optimality even with persistent current account surpluses or deficits. The observed persistent current account imbalances in many countries in recent decades are shown to be basically consistent with the predictions of this model. |
| Keywords: | Current account imbalance; Floating exchange rate; Heterogeneity |
| JEL: | E10 F30 F31 |
| Date: | 2015–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67177&r=all |