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on Open Economy Macroeconomics |
| By: | Sushant ACHARYA; Julien BENGUI |
| Abstract: | This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy's adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period where many advanced economies were pushed to the zero bound on interest rates. We establish three main results: (i) When the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. (ii) A free capital flow regime falls short of supporting efficientent demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. (iii) When it comes to capital flow management, individual countries' incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes. |
| Keywords: | Capital flows, international spillovers, liquidity traps, uncovered interest parity, capital flow management, policy coordination, optimal monetary policy |
| JEL: | E52 F32 F42 F44 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:14-2015&r=opm |
| By: | Drago Bergholt |
| Abstract: | How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results. |
| Keywords: | DSGE, Small open economy, International business cycles, Bayesian estimation |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0039&r=opm |
| By: | Paolo Epifani; Gino Gancia |
| Abstract: | We study the welfare effects of trade imbalances in a two-sector model of monopolistic competition. As in perfect competition, a trade surplus involves an income transfer to the deficit country and possibly a terms-of-trade deterioration. Unlike the conventional wisdom, however, trade imbalances do not impose any double burden on surplus countries. This is because of a production-delocation effect, which leads to a reduction in the local price index. In the presence of intermediate goods, new results arise: A trade surplus may lead to an appreciation of the exchange rate, to a terms-of-trade improvement and to a welfare increase under standard parameter configurations. In addition, policies that stabilize the exchange rate can make the balanced-trade equilibrium unstable. These results can explain why the manufacturing sector may agglomerate in countries that resist the real appreciation of their currency and suggest that a fixed exchange rate and nominal rigidities may generate short-run instability. |
| Keywords: | Trade Imbalances; Trade Costs; Monopolistic Competition; Intermediate Goods |
| JEL: | F1 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1503&r=opm |
| By: | Stevens, Luminita (Federal Reserve Bank of Minneapolis); Chahrour, Ryan (Boston College) |
| Abstract: | We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation. |
| Keywords: | Law of one price; Border effect; Real exchange rate |
| JEL: | E30 F30 F41 |
| Date: | 2015–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:522&r=opm |
| By: | Nie, Jun (Federal Reserve Bank of Kansas City); Luo, Yulei; Li, Wei |
| Abstract: | In this paper we examine the effects of elastic information-processing capacity (or optimal inattention) proposed in Sims (2010) on international consumption and income correlations in a tractable small open economy (SOE) model with exogenous income processes. We find that in the presence of capital mobility in financial markets, optimal inattention due to fixed information-processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty. In addition, we show that RI can also improve the model's predictions for the other key moments of the joint dynamics of consumption and income. Finally, we show that the main conclusions of our benchmark model do not change in an extension with capital accumulation. |
| Keywords: | Rational inattention; Elastic capacity; Risk sharing; International consumption correlations |
| JEL: | D83 E21 F41 G15 |
| Date: | 2015–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp15-16&r=opm |
| By: | Gabriel Gomes |
| Abstract: | This paper investigates to which extent dollar real exchange rate movements have a nonlinear impact on the short term dynamics of the real exchange rate of oil exporting economies. Estimating a panel cointegrating model for 11 OPEC and 5 major oil exporting countries over the 1980-2014 period, we find evidence to support their currencies can be considered as oil price driven. In fact, on the long run a 10% increase in the price of oil leads to a 2.1% appreciation of their real exchange rate. To analyse how dollar movements interact with the real exchange rate of those countries in the short run, we then estimate a panel smooth transition regression model. Results show that the real exchange rate of oil exporting economies is influenced by oil price fluctuations only if the dollar appreciation is lower than 2.6%. After the dollar appreciates beyond this threshold, their currencies are rather affected by other variables. |
| Keywords: | Oil price, Oil currencies, Oil exporting, Non-linearities. |
| JEL: | C33 F31 Q43 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2016-1&r=opm |
| By: | Ge, Wei; Kinnucan, Henry |
| Abstract: | Mongolia is a comparatively small country in the world and the limited domestic demand makes it rely on the trade with other countries. In recent years, Mongolia’s extensive mineral deposits and attendant growth in mining-sector activities have transformed Mongolia’s economy which traditionally has been dependent on herding and agriculture. An equilibrium displacement model based on the macro-economy conditions in Mongolia is conducted to test whether the development of the mining sector has come at the expense of the agricultural sector, as suggested by the “Dutch Disease” hypothesis. Base on the classic economic model developed by Corden and Neary (1982) to describe Dutch Disease: in an open small economy (Mongolia), the booming tradable sector (mining) would suppress the lagging or non-booming sector (agriculture). How the booming mining industry affects the traditional agriculture industry (including grazing) is the main point of this paper. |
| Keywords: | Dutch disease, agriculture, mining, Mongolia, International Relations/Trade, Resource /Energy Economics and Policy, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:saea16:229564&r=opm |
| By: | Stefan Angrick |
| Abstract: | This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime. |
| Keywords: | central banking, balance sheets, monetary policy, exchange rates, policy autonomy |
| JEL: | E51 E58 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:159-2015&r=opm |
| By: | Christine S. Makanza and J. Paul Dunne |
| Abstract: | The debate on global current account imbalances continues to develop, with growing interest in the macroeconomic instability and widening current account de…cits faced by emerging markets. Literature establishes that the current account behaves di¤erently depending on macroeconomic circumstances in countries, so approaches to managing external imbalances should be country tailored. Despite this realisation, there is a lack of investigation into drivers of the current account and the impact of macroeconomic policy on current account dynamics in emerging markets. To address this, the study estimates an SVAR model to analyse the e¤ect of …scal shocks on the current account. This helps to understand how …scal shocks shape current account developments, and establishes the usefulness of …scal consolidation in managing current account de…cits by determining whether the twin de…cits approach to managing the external balance holds in middle income countries. The study goes further to analyse the channels through which …scal shocks are transmitted to the current account to understand how current account management policies should be formulated. The study contributes to the literature by providing a case study of South Africa, an emerging economy characterised by large current account de…cits, macroeconomic volatility, a well developed …nancial sector, and a dataset which has not been exploited to understand the external balance. A particularly interesting …nding is that expansionary …scal shocks improve the current account through household savings and public investment , which is a departure from the twin de…cits hypothesis. |
| Keywords: | Current Account, Fiscal Shocks, Twin Deficit, Twin Divergence, South Afica |
| JEL: | E62 F32 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:565&r=opm |
| By: | Van Zandweghe, Willem (Federal Reserve Bank of Kansas City); Hirose, Yasuo; Kurozumi, Takushi |
| Abstract: | What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables suffices for explaining the shift. |
| Keywords: | Equilibrium indeterminacy; Monetary policy; Inflation |
| JEL: | C11 E31 E52 |
| Date: | 2015–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp15-17&r=opm |