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on Open Economy Macroeconomics |
| By: | Heathcote, Jonathan (Federal Reserve Bank of Minneapolis); Perri, Fabrizio (Federal Reserve Bank of Minneapolis) |
| Abstract: | In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries. |
| Keywords: | Capital controls; Terms of trade; International risk sharing |
| JEL: | F32 F41 F42 |
| Date: | 2016–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:523&r=opm |
| By: | Reinhart, Carmen M.; Reinhart, Vincent; Trebesch, Christoph |
| Abstract: | Capital flow and commodity cycles have long been connected with economic crises. Sparse historical data, however, has made it difficult to connect their timing. We date turning points in global capital flows and commodity prices across two centuries and provide estimates from alternative data sources. We then document a strong overlap between the ebb and flow of financial capital, the commodity price super-cycle, and sovereign defaults since 1815. The results have implications for today, as many emerging markets are facing a double bust in capital inflows and commodity prices, making them vulnerable to crises. |
| Keywords: | capital flows; commodity prices; financial crises; sudden stops |
| JEL: | E3 E44 F44 G01 N10 N20 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11096&r=opm |
| By: | Guillaume Plantin; Hyun Song Shin |
| Abstract: | When does the combination of flexible exchange rates and domestic inflation-oriented monetary policy guarantee insulation from global financial conditions? We examine a dynamic global game model of international portfolio flows where, for some combination of parameters, the unique equilibrium exhibits the observed empirical feature that currency appreciation goes hand-in-hand with lower domestic interest rates and higher credit growth. When reversed, tighter monetary conditions go hand-in-hand with capital outflows and currency depreciation. |
| Keywords: | currency appreciation, capital flows, global games |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:537&r=opm |
| By: | Britta Gehrke; Fang Yao (Reserve Bank of New Zealand) |
| Abstract: | This paper re-examines the role of supply shocks for real exchange rate fluctuations. First, in a structural VAR analysis, we combine long run and sign restrictions to identify productivity and non-productivity supply shocks. Second, we show that a variance decomposition in the frequency domain generates quantitatively different results compared to the standard forecast error variance decomposition. In particular, productivity shocks are the most important driver of US real effective exchange rate fluctuations at low frequencies, while real demand shocks are more salient at high frequencies. We use the spectrum at frequency zero to structurally decompose the persistence of the real exchange rate. Supply shocks explain more than half of the persistence of the exchange rate. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2016/02&r=opm |
| By: | Mirdala, Rajmund |
| Abstract: | The lack of nominal exchange rate flexibility in the monetary union induced the growing divergence of trade performance among the member countries. Intra-Eurozone current account imbalances among countries with different income levels per capita fuel discussions on competitiveness channels under common currency. Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate in the periphery economies originating in the strong shifts in consumer prices and unit labor costs in these countries relative to the countries of the Euro Area core. The issue is whether the real exchange rate is a significant driver of persisting current account imbalances in the Euro Area considering than, according to some authors, differences in domestic demand are more important than is often realized. In the paper we analyze main aspects of current account adjustments in the Euro Area member countries. From estimated VAR model we calculate impulse-response function of the current account to the real exchange rate (REER calculated on CPI and ULC base) and domestic demand shocks and variance decomposition to examine the relative importance of both shocks. Our results indicate that while the prices and costs related determinants of external competitiveness affected imports more significantly than exports, demand drivers shaped current account balances mainly during the crisis period. |
| Keywords: | current account, real exchange rate, economic crisis, vector autoregression, impulse-response function, variance decomposition |
| JEL: | C32 F32 F41 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68864&r=opm |
| By: | Gudmundsson, Gudmundur S.; Zoega, Gylfi |
| Abstract: | This paper describes the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rates may strengthen the currency by inducing owners of local currency assets not to sell local currency off shore. There is also an effect that goes in the opposite direction: higher interest rates may also increase the flow of interest income to foreigners through the current account, making the exchange rate fall. The historical financial crisis now under way in Iceland provides excellent testing grounds for the analysis. Overall, the experience does not suggest that cutting interest rates moderately from a very high level is likely to make a currency depreciate in a capital control regime, but it highlights the importance of effective enforcement of the controls. |
| Keywords: | financial crises,capital controls,policy rates,exchange rates |
| JEL: | G01 E42 E52 E58 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20163&r=opm |
| By: | Odhiambo, Nicholas M.; Njindan Iyke , Bernard |
| Abstract: | In this paper, we identify the fundamental determinants of the long-run exchange rates in South Africa. We then estimate the equilibrium real exchange rate for this country using a dataset covering the period 1975-2012. In order to account for possible short-run fluctuations in the real exchange rate, we conducted a cointegration test using the ARDL bounds-testing procedure. First, we found terms of trade, trade openness, government consumption, net foreign assets and real commodity prices to be the long-run determinants of the real exchange rate in South Africa. Second, we found that nearly 68.06 per cent of the real exchange rate disequilibrium is corrected annually. Overall, the estimated equilibrium exchange rate indicates that the Rand has been depreciating in real terms over the years. Tightening trade openness is not an option, given international agreements; on the other hand, terms of trade and real commodity prices are determined by the world market. The obvious policy alternative is for South Africa to increase government spending and moderately decrease her net foreign asset position. |
| Keywords: | Fundamental Determinants, Real Exchange Rates, Equilibrium Exchange Rate |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:uza:wpaper:18979&r=opm |
| By: | Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Abhijit Sen Gupta (Asian Development Bank) |
| Abstract: | This paper evaluates the case for greater exchange rate coordination in South Asia. With inter-regional integration in South Asia progressing at a faster pace than the region's integration with the world as well as the economies of South Asia being buffeted by similar external shocks there is a need for greater exchange rate cooperation among the economies of the region, while retaining the flexibility to adjust to external currencies. Using empirical methods, we find limited evidence of comovement of South Asian currencies in nominal terms, while the evidence for degree of comovement is slightly stronger in real terms. Much of the divergence in the movement of currencies is derived from the varied exchange rates being pursued in these economies. While India has increasingly moved towards a more flexible exchange rate regime, Bangladesh, Pakistan and Sri Lanka, continue to remain pegged to US Dollar. |
| Keywords: | Exchange Rate Coordination, Panel Unit Root, Exchange Rate Regimes |
| JEL: | F36 F55 F15 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2016-001&r=opm |
| By: | Chiţu, Livia |
| Abstract: | This paper assesses whether international reserve accumulation can be inflationary because of moral hazard and incentive effects. It tests the hypothesis that an increase in international reserves may incentivise countries to become complacent and pursue less prudent policies due to the perceived safety provided by higher reserve holdings. The paper uses a unique natural experiment to solve the endogeneity problem between reserve accumulation and macroeconomic developments, namely the 2009 general allocation of Special Drawing Rights (SDR). This allocation –the first one in almost three decades– enables to cleanly trace the effect of an unanticipated, global exogenous shock to the reserve holdings of the 186 IMF member countries. Difference-in-differences and propensity score matching estimates suggest that inflation in countries receiving large SDR allocations was about half a percentage point higher in annual terms within the next two years following the allocation, controlling for the standard arguments of the Phillips curve and other determinants. This effect is commensurate to the size of discretionary fiscal deficits in these countries, which is also consistent with the hypothesis that reserve accumulation may be inflationary because of moral hazard and incentive effects. JEL Classification: F30 |
| Keywords: | difference-in-differences, international reserves, moral hazard, natural experiment, propensity score matching estimates, special drawing right |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161880&r=opm |
| By: | Bertola, Giuseppe; Lo Prete, Anna |
| Abstract: | We analyze the implications of labor market reforms for an open economy’s human capital investment and future production. A stylized model shows that labor market deregulation can imply more positive current account balances if financial markets are imperfect and labor market institutions not only distort labor allocation, but also smooth income. Empirically, in OECD country-level panel data, we find that labor market deregulation has been positively related to current account surpluses on average and more strongly so when and where financial market access was more limited. These results are robust to inclusion of standard determinants of current account imbalances, and do not appear to be driven by cyclical phenomena. |
| Keywords: | labor market deregulation; precautionary savings |
| JEL: | E44 F32 J08 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10413&r=opm |
| By: | Nguyen, Ha; Duncan, Alan |
| Abstract: | In this paper we provide the first solid empirical evidence that improvements in home countries’ macroeconomic conditions, as measured by a higher GDP per capita or lower price levels, increase immigrants’ subjective well-being. We demonstrate this by using 12 years of data from the Household Income and Labour Dynamics in Australia panel, as well as macroeconomic indicators for 59 countries of origin, and exploiting exogenous changes in macroeconomic conditions across home countries over time. Controlling for immigrants’ observable and unobservable characteristics we also find the positive GDP impact is statistically significant and economically large in size. Furthermore, the GDP and price impact erodes when immigrants get older, or when they stay in the host country beyond a certain period of time. However, home countries’ unemployment rates and exchange rate fluctuations have no impact on immigrants’ well-being. |
| Keywords: | GDP, unemployment, inflation, exchange rate, well-being, immigrants, Australia |
| JEL: | F22 I31 J15 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:69593&r=opm |
| By: | Duncan, Roberto (Ohio University) |
| Abstract: | Traditionally, the literature that attempts to explain the link between the current account and output finds a linear negative relationship (e.g., Backus et al., 1995). Using nonparametric regressions, we find a robust U-shaped relationship between the U.S. current account and the GDP cycle. When output is above (below) its trend the current account and detrended output are positively (negatively) correlated. We argue that this nonlinearity might be caused by persistent productivity shocks coupled with uncertainty shocks about future productivity. |
| JEL: | E3 F3 F4 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:253&r=opm |
| By: | Lorenzo Bretscher; Christian Julliard; Carlo Rosa |
| Abstract: | We study the implications of human capital hedging for international portfolio choice. First, we document that, at the household level, the degree of home country bias in equity holdings is increasing in the labor income to financial wealth ratio. Second, we show that a heterogeneous agent model in which households face short selling constraints and labor income risk, calibrated to match both micro and macro labor income and asset returns data, can both rationalize this finding and generate a large aggregate home country bias in portfolio holdings. Third, we find that the empirical evidence supporting the belief that the human capital hedging motive should skew domestic portfolios toward foreign assets, is driven by an econometric misspecification rejected by the data. |
| Keywords: | home country bias; incomplete markets; international diversification puzzle; non-traded human capital; hedging human capital; optimal portfolio choice. |
| JEL: | C1 F3 G3 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:64835&r=opm |
| By: | Lorenzo Bretscher; Christian Julliard; Carlo Rosa |
| Abstract: | We study the implications of human capital hedging for international portfolio choice. First, we document that, at the household level, the degree of home country bias in equity holdings is increasing in the labor income to financial wealth ratio. We show that a heterogeneous agent model in which households face short selling constraints and labor income risk, calibrated to match both micro and macro labor income and asset returns data, can both rationalize this finding and generate a large aggregate home country bias in portfolio holdings. Second, we find that the empirical evidence supporting the belief that the human capital hedging motive should skew domestic portfolios toward foreign assets, is driven by an econometric misspecification rejected by the data. Third, we show that, given the high degree of international GDP correlations in the data, very small domestic redistributive shocks are sufficient to skew portfolios toward domestic assets. |
| Keywords: | home country bias; incomplete markets; international diversification puzzle; non-traded human capital; hedging human capital; optimal portfolio choice. |
| JEL: | F30 G11 G12 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:65091&r=opm |