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on Open Economy Macroeconomics |
| By: | Alberto Cavallo; Roberto Rigobon |
| Abstract: | New data-gathering techniques, often referred to as “Big Data” have the potential to improve statistics and empirical research in economics. In this paper we describe our work with online data at the Billion Prices Project at MIT and discuss key lessons for both inflation measurement and some fundamental research questions in macro and international economics. In particular, we show how online prices can be used to construct daily price indexes in multiple countries and to avoid measurement biases that distort evidence of price stickiness and international relative prices. We emphasize how Big Data technologies are providing macro and international economists with opportunities to stop treating the data as “given” and to get directly involved with data collection. |
| JEL: | E31 F3 F4 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22111&r=opm |
| By: | Mark Aguiar; Satyajit Chatterjee; Harold Cole; Zachary Stangebye |
| Abstract: | This chapter is on quantitative models of sovereign debt crises in emerging economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multi-period debt, (v) a default penalty that includes both a reputation loss and a physical output loss and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research. |
| JEL: | E32 E44 E62 F34 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22125&r=opm |
| By: | Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui |
| Abstract: | The euro crisis shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles. |
| Keywords: | Euro Crisis, Exchange Rate Misalignments, Eurobonds, Interest Rate. |
| JEL: | F31 F32 F37 F41 E12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-19&r=opm |
| By: | Amiti, Mary (Federal Reserve Bank of New York); Itskhoki, Oleg (Princeton University); Konings, Jozef (Katholieke Universitei Leuven, National Bank of Belgium) |
| Abstract: | How strong are strategic complementarities in price setting across firms? In this paper, we provide a direct empirical estimate of firms’ price responses to changes in prices of their competitors. We develop a general framework and an empirical identification strategy to estimate the elasticities of a firm’s price response both to its own cost shocks and to the price changes of its competitors. Our approach takes advantage of a new micro-level data set for the Belgian manufacturing sector, which contains detailed information on firm domestic prices, marginal costs, and competitor prices. The rare features of these data enable us to construct instrumental variables to address the simultaneity of price setting by competing firms. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 35 percent in response to the price changes of its competitors and with an elasticity of 65 percent in response to its own cost shocks. Furthermore, we find substantial heterogeneity in these elasticities across firms, with small firms showing no strategic complementarities and a complete cost pass-through, and large firms responding to their cost shocks and competitor price changes with roughly equal elasticities of around 50 percent. We show, using a tightly calibrated quantitative model, that these findings have important implications for shaping the response of domestic prices to international shocks. |
| Keywords: | strategic complementarities; pass-through; exchange rates; prices; mark-up |
| JEL: | D22 E31 F31 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:771&r=opm |
| By: | Ippei Fujiwara; Timothy Kam; Takeki Sunakawa |
| Abstract: | We provide new insight on international monetary policy cooperation using a two-country model based on Benigno and Benigno (2006). Assuming symmetry, save for the volatility of (markup) shocks, we show that an incentive feasibility problem exists between the policymakers across national borders: The country faced with a relatively more volatile markup shock has an incentive to deviate from an assumed Cooperation regime to one with Noncooperation. More generally, a similar result obtains if countries differ in size. This motivates our study of a history-dependent Sustainable Cooperation regime which is endogenously sustained by a cross-country, state-contingent contract between policymakers. Under Sustainable Cooperation, the responses of inflation and the output gap in both countries are different from those induced by the Cooperation and Noncooperation regimes reflecting the endogenous welfare redistribution between countries under the state-contingent contract. Such history-contingent welfare redistributions are supported by resource transfers affected through incentive-compatible variations in the terms of trade (or net exports). Such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality. |
| Keywords: | Monetary policy cooperation, Sustainable plans, Welfare |
| JEL: | E52 F41 F42 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-14&r=opm |
| By: | Matthieu Bussière; Julia Schmidt; Natacha Valla |
| Abstract: | This policy brief documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight four key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can predominantly be related to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, the global patterns of net flows have also recorded significant changes. Overall, net flows have fallen substantially relative to the years preceding the sudden stop, which is to some extent an expression of the changes registered in the current account. Fourth, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, FDI flows have been barely affected and now represent roughly 45% of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows, which should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this policy brief turns to possible explanations for and likely implications of these changes, regarding international financial stability issues. |
| Keywords: | international financial flows;capital controls;macroprudential policy;financial stability;global imbalances |
| JEL: | F32 F36 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepipb:2016-10&r=opm |
| By: | Bonadio, Barthélémy; Fischer, Andreas M; Sauré, Philip |
| Abstract: | This paper analyzes the speed of the exchange rate pass-through into importer and exporter unit values for a large, unanticipated, and unusually 'clean' exchange rate shock. Our shock originates from the Swiss National Bank's decision to lift the minimum exchange rate policy of one euro against 1.2 Swiss francs on January 15, 2015. This policy action resulted in a permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the response of unit values to this exchange rate shock at the daily frequency for different invoicing currencies using the universe of Switzerland's transactions-level trade data. The main finding is that the speed of the exchange rate pass-through is fast: it starts on the second working day after the exchange rate shock and reaches the medium-run pass-through after eight working days on average. Moreover, we decompose the pass-through by invoicing currencies and find strong evidence that underlying price adjustments occurred within a similar time frame. Our observations suggest that nominal rigidities play only a minor role in the face of large exchange rate shocks. |
| Keywords: | daily exchange rate pass-through; large exchange rate shock; speed |
| JEL: | F14 F31 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11195&r=opm |
| By: | Frederic Ganon (University of Le Havre - EDEHN); Gilles Le Garrec (OFCE Sciences PO); Vincent Touzé (OFCE, Sciences Po) |
| Abstract: | This paper analyses how the economic, demographic and institutional differences between two regions -one developed and called the North, the other emerging and called the South- drive the international capital flows and explain the world economic equilibrium. To this end, we develop a simple two-period OLG model. We compare closed-economy and open-economy equilibria. We consider that openness facilitates convergence of South’s characteristics towards North’s. We examine successively the consequences of a technological catching-up, a demographic transition and an institutional convergence of pension schemes. We determine the analytical solution of the dynamics of the world interest rate and deduce the evolution of the current accounts. These analytical results are completed by numerical simulations. They show that the technological catching-up alone leads to a welfare loss for the North in reason of capital flows towards the South. If we add to this first change a demographic transition, the capital demand is reduced in the South whereas its saving increases in reason of a higher life expectancy. These two effects contribute to reduce the capital flows from the North to the South. Finally, an institutional convergence of the two pension schemes reduces the South’s saving rate which increases the capital flow from the North to the South. |
| Keywords: | International Capital flows, OLG, Economic convergence, demographic transition |
| JEL: | D91 F40 J10 O33 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1609&r=opm |
| By: | Njindan Iyke, Bernard |
| Abstract: | In this paper, we examine the role of relative productivity growth in real misalignment of exchange rates in Latin American countries. Specifically, we verify the validity of the Penn Effect for selected countries in this region. Our sample consists of fifteen countries from the Latin American region for the period 1951 to 2010. We employ both short- and long-panel data techniques, which allow us to experiment with estimators suitable for short and long time dimensions of panel data. The Penn Effect is found to be supported for the entire sample, and for subsamples. Relative productivity growth is dominant in the real exchange rate movement during periods of mild or weak speculative attacks, as compared with periods of severe speculative attacks. To correct for real misalignment of currencies in Latin America under speculative attacks, relative productivity growth must be sizeable. |
| Keywords: | Penn Effect, real exchange rate, productivity growth, Latin America |
| JEL: | C23 F21 F31 |
| Date: | 2016–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70593&r=opm |