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on Open Economy Macroeconomics |
| By: | Matteo Maggiori; Emmanuel Farhi |
| Abstract: | We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: under a Hegemon vs. a multi-polar world; when reserve assets are abundant vs. scarce; under a gold exchange standard vs. a floating rate system; away from or at the zero lower bound (ZLB). We rationalize the Triffin dilemma which posits the fundamental instability of the system, the common prediction regarding the natural and beneficial emergence of a multi-polar world, the Nurkse warning that a multi-polar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold exchange standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. Our analysis is both positive and normative. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:395921&r=opm |
| By: | Markus K. Brunnermeier; Luis Garicano; Philip R. Lane; Marco Pagano; Ricardo Reis; Tano Santos; David Thesmar; Stijn Van Nieuwerburgh; Dimitri Vayanos |
| Abstract: | We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free. |
| Keywords: | ‘diabolic loop’; sovereign debt crisis; ESBies |
| JEL: | G18 G21 G28 H63 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:66429&r=opm |
| By: | Mariarosaria Comunale |
| Abstract: | In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994-2012, with annual frequency. We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003-2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments. In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run. |
| Keywords: | real effective exchange rate, behavioural effective exchange rate, foreign capital inflows, FDIs, Dutch disease, GDP growth, European Union |
| JEL: | F31 F43 C23 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-28&r=opm |
| By: | Wyatt J. Brooks; Pau S. Pujolas |
| Abstract: | We compare the welfare gains from a reduction in trade costs implied by a dynamic model with capital accumulation to a standard static trade model. The static and dynamic trade models differ in their welfare implications along four dimensions: transition costs, endogenous capital, composition of expenditure between investment and consumption goods, and computation of the trade elasticity. We provide a theoretical decomposition of these four effects, then quantify them in a parameterized example. Gains from trade differ considerably in the two models, even though they imply the same trade elasticity and import penetration ratio. In our base case, removal of a 100% trade cost increases welfare by 14% in the static model and 20% in the dynamic model. Our decomposition demonstrates that the most important difference between the two models is the endogeneity of capital. |
| Keywords: | Gains from Trade, Capital Accumulation, Static Gains, Dynamic Gains |
| JEL: | E13 F11 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2016-03&r=opm |
| By: | Punnoose Jacob; Anella Munro (Reserve Bank of New Zealand) |
| Abstract: | The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifes the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth. |
| JEL: | E31 E32 E44 F41 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2016/04&r=opm |
| By: | Alessandro Barattieri |
| Abstract: | In this paper, I show a strong positive correlation between the value-added share of manufacturing in 2000 and current account balances in 2007 for the Euro area countries. I propose asymmetries in the timing of trade liberalizations as a new mechanism affecting the dynamics of the current account. I build intuition using a simple model. Then, I use an international business cycle model to show how the asymmetric dynamics of trade costs in manufacturing and services in 2000-2007 can partially explain the rise in the German surplus. Lastly, I provide broad empirical support for the key predictions of the theory. |
| Keywords: | Current Account Dynamics, Relative Trade Liberalization Measures |
| JEL: | F1 F32 F40 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:447&r=opm |
| By: | Ergys Islamaj; M. Ayhan Kose |
| Abstract: | This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income. |
| Keywords: | Consumption Sensitivity, Financial Integration, Risk Sharing, Intertemporal Smoothing |
| JEL: | E21 F02 F4 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-22&r=opm |
| By: | E. Monnet; D. Puy |
| Abstract: | This paper assesses the strength of business cycle synchronization between 1950 and 2014 in a sample of 21 countries using a new quarterly dataset based on IMF archival data. Contrary to the common wisdom, we find that the globalization period is not associated with more output synchronization at the global level. The world business cycle was as strong during Bretton Woods (1950-1971) than during the Globalization period (1984-2006). Although globalization did not affect the average level of co-movement, trade and financial integration strongly affect the way countries co-move with the rest of the world. We find that financial integration de-synchronizes national outputs from the world cycle, although the magnitude of this effect depends crucially on the type of shocks hitting the world economy. This de-synchronizing effect has offset the synchronizing impact of other forces, such as increased trade integration |
| Keywords: | International Business Cycles, Synchronization, Financial integration, Trade integration, Globalization. |
| JEL: | E32 F41 F42 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:592&r=opm |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | A new theoretical literature studies the use of capital controls to prevent financial crises in models in which pecuniary externalities justify government intervention. Within the same theoretical framework, we show that when ex-post policies such as defending the exchange rate can contain or resolve financial crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail some efficiency costs, then crises prevention policies become part of the optimal policy mix. In the standard model economy used in the literature with costly crisis management policies, the optimal policy mix combines capital controls in tranquil times with support for the real exchange rate to limit its depreciation during crises times. The optimal policy mix yields more borrowing and consumption, a lower probability of financial crisis, and twice as large welfare gains than in the socially planned equilibrium with capital controls alone. |
| JEL: | E52 F38 F41 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22224&r=opm |