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on Open Economy Macroeconomics |
| By: | Fujiwara, Ippei (Keio University); Wang, Jiao (Australian National University) |
| Abstract: | This paper revisits optimal monetary policy in open economies, in particular, focusing on the noncooperative policy game under local currency pricing in a two-country dynamic stochastic general equilibrium model. We first derive the quadratic loss functions which noncooperative policy makers aim to minimize. Then, we show that noncooperative policy makers face extra trade-offs regarding stabilizing the real marginal costs induced by deviations from the law of one price under local currency pricing. As a result of the increased number of stabilizing objectives, welfare gains from cooperation emerge even when two countries face only technology shocks, which usually leads to equivalence between cooperation and noncooperation. Still, gains from cooperation are not large, implying that frictions other than nominal rigidities are necessary to strongly recommend cooperation as an important policy framework to increase global welfare. |
| JEL: | E52 F41 F42 |
| Date: | 2016–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:272&r=opm |
| By: | Martin Bodenstein; Gunes Kamber; Christoph Thoenissen |
| Abstract: | We investigate the connection between commodity price shocks and unemployment in advanced resource-rich small open economies from an empirical and theoretical perspective. Shocks to commodity prices are shown to influence labour market conditions primarily through the real exchange rate contrasting sharply with the transmission of technology shocks which are typically argued to affect the economy by changing labour productivity. The empirical impact of commodity price shocks is obtained from estimating a panel vector autoregression; a positive price shock is found to be expansionary for the components of GDP, causes the real exchange rate to appreciate, and improves labour market conditions. For every one percent increase in commodity prices, our estimates suggest a one basis point decline in the unemployment rate and at its peak a 0.3% increase in unfilled vacancies. We then match the impulse responses to a commodity price shock from a small open economy model with net commodity exports and search and matching frictions in the labour market to these empirical responses. As in the data, an increase in commodity prices raises consumption demand in the small open economy and induces a real appreciation. Facing higher relative prices for their goods, non-commodity producing firms post additional job vacancies, causing the number of matches between firms and workers to rise. As a result, unemployment falls, even if employment in the commodity-producing sector is negligible. For commodity price shocks, there is little difference between the standard Diamond (1982), Mortensen (1982), and Pissarides (1985) approach of modelling search and matching frictions and the alternating offer bargaining model suggested by Hall and Milgrom (2008). |
| Keywords: | Commodity prices, search and matching unemployment. |
| JEL: | E44 E61 F42 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-24&r=opm |
| By: | Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | Summary This paper examines current account developments in different country groups amongst the lower- and medium-income European economies (LMIEs) both prior to the crisis and following it. The Baltic countries, the Western Balkan as well as the Southern EU countries (Greece, Portugal and Spain) showed rather dramatic deteriorations in their current accounts prior to the outbreak of the financial crisis in 2008/2009, while in the Central and Eastern European countries current account deficits never exploded. What drove current account developments before the crisis and have external imbalances been sustainably corrected? We investigate whether and to which extent adjustments took place in terms of trade performance, real effective exchange rates and components of unit labour costs. Finally, we look at developments of the tradable and non-tradable sectors of the economy and find that ‘structural’ current account problems are grounded in persistent weaknesses of the tradable sector. As such, policy implications would entail that countries which suffer from longer-term ‘structural’ external imbalances have to strongly focus their policy attention on a recovery of the tradable sector. |
| Keywords: | trade and current account imbalances, real effective exchange rates, unit labour costs, structural developments, tradable sector, non-tradable sector, lower- and medium-income European economies (LMIEs), Central and Eastern European countries, Western Balkan countries, Southern EU countries |
| JEL: | O10 F14 J3 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:wii:rpaper:rr:410&r=opm |
| By: | Samuel Cudre; Mathias Hoffmann |
| Abstract: | We model capital flows among Chinese provinces using a theory-based variance decomposition that allows us to gauge the importance of various channels of external adjustments at the regional level: variation in intertemporal prices - domestic and international interest rates and the real exchange rate - and intertemporal variation in quantities (cash flows of output, investment and government spending). We find that our simple framework can account for around 85 percent of the variation in regional capital flows over the 1985-2010 period. Our results suggest that the relative importance of private and state-owned enterprises, a province's level of integration into the world economy and its sectoral composition play an important role for external adjustment vis-`a-vis the rest of China and the world. Specifically, we find strong empirical support for the view that differential access of private and state-owned enterprises to finance is a key driver of China's surpluses. We discuss implications of our results for global imbalances in capital flows. |
| Keywords: | China, Chinese Provinces, Capital Flows, Current Account, Global Imbalances, External Adjustment, Present-Value Models, Regional Business Cycles. |
| JEL: | F30 F32 F40 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-18&r=opm |
| By: | Kuzmin, Anton |
| Abstract: | The model of the equilibrium exchange rate of ruble is under construction on the basis of streams of the balance of payments of Russia taking into account trade conditions. Export-import transactions, factors of movement of the capital, a trade condition, indexes of the internal and export prices, and real gross domestic product, factors of elasticity of the foreign trade operations, decisions of microagents are used as base determinants in the model. In the process of creating the model it was justified a number of key internal dynamic functional dependencies were found that has allowed us to put the capital flows in the model on formal logical level, and, thus, to extend the model to the case of capital mobility. We discuss the relationship results from the fundamental equilibrium exchange rate in the framework of the author's conceptual approach to the assessment of the equilibrium exchange rate based on international flows (IFEER). The technique of adjustment of model internal parametres is offered with a view of macroeconomic regulation of the exchange rate of ruble. Based on the modeling results we built the analysis of the dynamics of the nominal exchange rate of ruble in 2013- 2015. |
| Keywords: | Ethe equilibrium exchange rate, exchange rate of ruble, the balance of payments, a trade condition, the macroeconomic policy, capital streams |
| JEL: | E44 E52 F31 F37 F38 F41 F47 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71012&r=opm |
| By: | Galina Hale; Tümer Kapan; Camelia Minoiu |
| Abstract: | We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks' profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks' supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission. |
| Keywords: | International banking;External shocks;Financial crises;Banks;Profits;Loans;Financial sector;shock transmission, long-term interbank exposures, systemic banking crises, financial networks, syndicated loans |
| Date: | 2016–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/91&r=opm |
| By: | Cette, Gilbert (Banque de France); Fernald, John G. (Federal Reserve Bank of San Francisco); Mojon, Benoit (Banque de France) |
| Abstract: | In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence. |
| JEL: | D24 E23 E44 F45 O47 |
| Date: | 2016–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2016-08&r=opm |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | Business cycles among industrial countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of “animal spirits†, i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We do not need a correlation of exogenous shocks to generate synchronization. We also empirically test the main predictions of the model. |
| Keywords: | animal spirits; behavioral macroeconomics; Business Cycles |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11257&r=opm |