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on Open Economy Macroeconomics |
| By: | Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Nenova, Tsvetelina (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country’s vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two financial factors: income on international investments and changes in the valuations of those investments. We show how the characteristics of a country’s international investment portfolio — the size of its international asset and liability holdings, their currency denominations, their split between equity and debt exposures, and their return characteristics — affect the dynamics of these financial factors. Then we decompose those dynamics into their drivers and explore how they are affected by domestic and global risk. We apply this framework to ten OECD economies, showing the flexibility of this approach and how the countries’ different international investment portfolios generate different dynamics in international investment income and positions. These examples, including a more detailed assessment based on an SVAR for the United Kingdom, show that a substantial degree of international risk sharing can occur through current accounts and international portfolios. Our framework clarifies which characteristics of a country’s international portfolio determine whether a current account deficit is ‘menacing’ or ‘mitigating’. |
| Keywords: | Current account; risk; international investment income; valuation effects; |
| JEL: | F21 F32 F36 F42 |
| Date: | 2016–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0046&r=opm |
| By: | Davide Romelli; Cristina Terra; Enrico Vasconcelos |
| Abstract: | This article investigates the impact of trade openness on the relationship between current account and real exchange rates, during episodes of sudden stops and of abrupt exchange rate depreciations. Using data for developed and emerging economies for the period 1970--2011, we find that more open economies are associated with lower exchange rate depreciations during sudden stops. We also provide evidence that, during abrupt exchange rate depreciation episodes, economies that are more open to trade experience a larger change in current account and trade balance. In other words, our results indicate that improvements in current account and trade balance are accompanied by a smaller exchange rate depreciation in more open economies. These findings are robust to different measures of openness to trade and methodologies of identifying sudden stops and abrupt exchange rate depreciations |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:437&r=opm |
| By: | Crowley, Patrick M.; Trombley, Christopher |
| Abstract: | Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample. |
| Keywords: | business cycles, growth cycles, frequency domain, optimal currency area, macroeconomic synchronization, monetary policy, single currency |
| JEL: | C49 E32 F44 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_011&r=opm |
| By: | Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Weale, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | Does the current account improve or deteriorate following a monetary policy expansion? We examine this issue theoretically and empirically. We show that a standard open economy DSGE model predicts that the current account response to a monetary policy shock depends on the degree of economic regulation in different markets. In particular, financial (product market) liberalisation makes it more likely that the current account deteriorates (improves) following a monetary expansion. We test these theoretical predictions with a varying coefficient Bayesian panel VAR model, where the coefficients are allowed to vary as a function of the degree of financial, product and labour market regulation on data from 1976 Q1–2006 Q4 for 19 OECD countries. Our empirical results support the theory. We therefore conclude that following a monetary policy expansion, the current account is more likely to go into deficit (surplus) in countries with more liberalised financial (product) markets. |
| Keywords: | Balance of payments; current account; Bayesian panel VAR; economic liberalisation; monetary policy |
| JEL: | C11 C23 E52 F32 |
| Date: | 2016–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0045&r=opm |
| By: | Mao, Rui; Yao, Yang |
| Abstract: | This paper empirically studies how a fixed exchange rate regime (FERR) may promote economic growth by undermining the Balassa-Samuelson effect. When total factor productivity (TFP) is faster in the industrial sector than in the non-tradable sectors, an FERR can suppress the Balassa-Samuelson effect if adjustment of domestic prices is subject to nominal rigidities. With WDI data on sectoral value-added and data from the PPP converter provided by the Penn World Table, we are able to estimate the home country’s industrial-service (quasi-) relative-relative TFP in comparison with the United States. Applying those esti-mates, our econometric exercises then provide robust results that an FERR dampens the Balassa-Samuelson effect and that the real undervaluation that ensues does indeed promote growth. We also explore the channels for undervaluation to promote growth. Lastly, we compare industrial countries and developing countries and find that an FERR has more significant impacts on developing countries than on industrial countries. |
| Keywords: | fixed exchange rate regime, real undervaluation, economic growth |
| JEL: | F31 F43 O41 |
| Date: | 2015–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2015_023&r=opm |
| By: | Şen, Hüseyin; Kaya, Ayşe |
| Abstract: | This study empirically examines the validity of the twin and triple deficits hypotheses using bootstrap panel Granger causality analysis and an annual panel data set of six post-communist countries (Russia, Poland, Ukraine, Romania, the Czech Republic, and Hungary) from 1994 to 2012. Our findings, based on panel data analysis under cross-sectional dependence and country-specific heterogeneity, support neither the twin deficits hypothesis nor its extended version, the triple deficits hypothesis, for any of the countries considered. In other words, we find no Granger-causal relationship between budget deficits and trade (or current account) deficits or among budget deficits, private savings-investment deficits, and trade deficits. |
| Keywords: | macroeconomic policy, fiscal policy, twin deficits, triple deficits, post-communist countries, transition economies, bootstrap panel granger causality test |
| JEL: | E60 F30 F32 H62 |
| Date: | 2016–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2016_003&r=opm |
| By: | Jose De Gregorio |
| Abstract: | Data for a large sample of countries dating back to the early 1970s reveal that the large depreciations against the dollar that are occurring in many countries are not unprecedented in magnitude or duration. The pass-through to inflation from exchange rate depreciation has been slightly more muted than in previous occasions, but it is not out of line with experience since the mid-1990s. The current account adjustment has been more limited than in the past, possibly suggesting that the period of weak currencies may be prolonged. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp421&r=opm |
| By: | Emmanuel Farhi; Matteo Maggiori |
| 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: a Hegemon vs. a multipolar world; abundant vs. scarce reserve assets; a gold exchange standard vs. a floating rate system; away from vs. at the zero lower bound (ZLB). We rationalize the Triffin dilemma, which posits the fundamental instability of the system, as well as the common prediction regarding the natural and beneficial emergence of a multipolar world, the Nurkse warning that a multipolar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold 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. We analyze forces that lead to the endogenous emergence of a Hegemon. Our analysis is both positive and normative. |
| JEL: | E12 E42 E43 E44 E52 E61 F02 F31 F32 F33 F34 F36 F38 F42 F44 F53 F55 G11 G12 G15 G18 G21 G23 G28 H12 H63 H87 N1 N10 N11 N12 N13 N14 N2 N20 N21 N22 N23 N24 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22295&r=opm |