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on Open Economy Macroeconomics |
| By: | te Kaat, Daniel Marcel; Dinger, Valeriya |
| Abstract: | Financial crises are usually preceded by large current account deficits. However, the channel through which international capital flows affect financial stability is hardly identified, yet. In this paper, we study the impact of current account balances on bank risk-taking making use of the exogenous and huge variation in capital flows within the euro area between the years 2001 and 2012. We find that bank risk-taking is positively associated with current account deficits. We provide a series of tests showing that this is the case both because banks in countries with large external deficits substitute new investments in asset markets (e.g. sovereign debt) with loans that are typically riskier and because the average quality of bank loans deteriorates. |
| JEL: | F32 F41 G01 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112866&r=opm |
| By: | Vogel, Lukas; Kollmann, Robert; Ratto, Marco; Roeger, Werner; in 't Veld, Jan |
| Abstract: | We estimate a three-country model using 1995 2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyse the determinants of Germany s current account (CA) surplus after the launch of the euro. Our results suggest that the German surplus reflects a succession of distinct shocks. Mono-causal explanations of the surplus are thus insufficient. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The key shocks that drove the rise in the German CA tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German CA surplus. An expansion in German government consumption and investment would raise German GDP and reduce the CA surplus, but the effects on the surplus would be weak. |
| JEL: | E30 F30 F40 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112810&r=opm |
| By: | Talavera, Oleksandr; Gorodnichenko, Yuriy |
| Abstract: | We document basic facts about prices in online markets in the U.S. and Canada, a rapidly growing segment of the retail sector. Relative to prices in regular stores, prices in online markets are more flexible as well as exhibit stronger pass-through (60-75 percent) and faster convergence (half-life less than 2 months) in response to movements of the nominal exchange rate. Multiple margins of adjustment (frequency of price changes, direction of price changes, size of price changes, exit of sellers) are active in the process of responding to nominal exchange rate shocks. Furthermore, we use the richness of our dataset to show that degree of competition, stickiness of prices, synchronization of price changes, reputation of sellers, and returns to search effort are important determinants of pass-through and speed of price adjustment for international price differentials. |
| JEL: | E31 F41 F40 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112885&r=opm |
| By: | Julian di Giovanni (Universitat Pompeu Fabra, Barcelona GSE, CREI and CEPR); Andrei A. Levchenko (University of Michigan, NBER, and CEPR); Isabelle Méjean (Ecole Polytechnique and CEPR) |
| Abstract: | This paper investigates the role of individual firms in international business cycle comovement using data covering the universe of French firm-level value added, bilateral imports and exports, and cross-border ownership over the period 1993-2007. At the micro level, controlling for firm and country effects, trade in goods with a particular foreign country is associated with a significantly higher correlation between a firm and that foreign country. In addition, foreign multinational affliates operating in France are significantly more correlated with the source economy. The impact of direct trade and multinational linkages on comovement at the micro level has significant macro implications. Because internationally connected firms are systematically larger than noninternationally connected firms, the firms directly linked to foreign countries represent only 8% of all firms, but 56% of all value added, and account for 75% of the observed aggregate comovement. Without those linkages the correlation between France and foreign countries would fall by about 0.091, or one-third of the observed average business cycle correlation of 0.29 in our sample of partner countries. These results are evidence of transmission of business cycle shocks through direct trade and multinational ownership linkages at the firm level. |
| Keywords: | Comovement, International Trade, Firm-Level Shocks, Large Firms |
| JEL: | F44 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:649&r=opm |
| By: | Enders, Zeno; Peter, Alexandra |
| Abstract: | The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channels in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German and UK data, the model attributes around half of the observed maximum output decline in Germany to these channels, and 87% for the UK. While the trade channel explains 30% of the empirical output decline in both countries, the financial channel plays a much larger role in the UK than in Germany. The UK's larger vulnerability to financial shocks is due to higher foreign-asset holdings, which simultaneously serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter bank capital regulations would have deepened the initial slump while simultaneously speeding up the recovery. |
| JEL: | F44 F41 E32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113022&r=opm |
| By: | Theobald, Thomas; Grüning, Patrick; van Treeck, Till |
| Abstract: | Germany entered the euro with a current account deficit but over the entire past decade has run large and persistent current account surpluses. Besides joining the common currency, the increase of Germany's current account since the late 1990s has been accompanied by strong shifts in the personal and, in particular, the functional income distribution. In this paper, we argue that income inequality should always be analyzed with respect to both the personal and the functional distribution of income. We then present a dynamic stochastic general equilibrium (DSGE) model in which a current account surplus arises as an endogenous result of a decrease in the share of household income in national income. On the one hand, this result complements existing literature where current account deficits result from rising personal income inequality. On the other hand, we find that current account imbalances will be more pronounced when accompanied by changes in the financial system. Accordingly, if we link Germany's accession to the European monetary union to lower exchange rate costs for German bank lending, the current account surplus becomes larger. |
| JEL: | D31 E17 F32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112846&r=opm |
| By: | Blagov, Boris; Funke, Michael |
| Abstract: | An estimated Markov-switching DSGE modelling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong s linked exchange rate system. The model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse re- sponses to macroeconomic shocks reveal substantial differences in spreads. These findings contribute to efforts at modelling exchange rate regime credibility as a non-linear process with two distinct regimes. |
| JEL: | E32 F41 C51 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:112819&r=opm |
| By: | von Borstel, Julia; Eickmeier, Sandra; Krippner, Leo |
| Abstract: | We investigate the pass-through of monetary policy to bank lending rates in the euro area before and during the sovereign debt crisis. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks markups. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation. |
| JEL: | E52 E43 C32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113035&r=opm |
| By: | Hohberger, Stefan; Kraus, Lena |
| Abstract: | Large trade imbalances have emerged as major policy challenges for the euro area within the last decade. As fiscal policy is the major macroeconomic policy instrument left with the individual member countries of EMU, fiscal devaluation is a highly debated policy tool to mimic the effects of an external devaluation by implementing a budgetary-neutral tax shift from direct to indirect taxes. This paper uses a two-region two-sector DSGE model with nominal wage and price rigidities to analyse the welfare effects of fiscal devaluation understood as tax shift from social security contributions for employers to value-added tax in a small open economy in monetary union. This paper finds that fiscal devaluation can stabilise excessive trade balance fluctuations but implies welfare losses for the average household. The results are robust to several sensitivity checks. |
| JEL: | E62 F32 F41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc15:113193&r=opm |
| By: | Marco Hoeberichts; Ad Stokman |
| Abstract: | Persistent price differences across euro area countries are an indication of incomplete economic integration. We analyze long and short run developments of price level dispersion in the euro area and compare the results with the situation in the US. We find that monetary and economic integration in Europe has been successful in establishing a major downward trend in price level differences across countries since 1960. In 2007, price level dispersion in the euro area was at the same level as in the US. After the financial crisis, dispersion first continued its downward trend before diverging economic conditions across euro area countries contributed to a widening of price level differences again. Short-run dynamics show that price dispersion in Europe deviates more from the long-term equilibrium than in the US, although deviations have become smaller since EMU. |
| Keywords: | economic integration; price-level convergence; law of one price; EMU; US |
| JEL: | E31 E37 F15 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:497&r=opm |