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on Open Economy Macroeconomics |
| By: | Gourinchas, Pierre-Olivier; Philippon, Thomas; Vayanos, Dimitri |
| Abstract: | We provide an empirical and theoretical analysis of the Greek Crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending boom/busts in emerging and advanced economies since 1980. The decline in Greece's output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macro-finance model to understand what happened. We find that a severe macroeconomic adjustment was inevitable given the size of the fiscal imbalance; yet a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro/financial imbalances can account for much of the depth of the crisis. When we simulate an emerging market sudden stop with initial debt levels (government, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of non-performing loans and strong price rigidities in product markets. |
| Keywords: | bank-sovereign loop; DSGE model; fiscal contraction; Greek crisis; price rigidities; sovereign default; sudden stop |
| JEL: | E2 E3 E5 E6 F3 F4 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11334&r=opm |
| By: | Matteo Maggiori; Xavier Gabaix |
| Abstract: | We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment. |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:181761&r=opm |
| By: | Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic) |
| Abstract: | We use the behavioral equilibirum exchange rate (BEER) approach to examine the extent of real exchange rate misalignment in the euro area over the period 1980-2014. In a panel data setting, we find significant links between real exchange rates, relative productivity, trade balance and terms of trade. Unlike other papers related to the topic, we go further in the direction of linking the estimated misalignment to inflationary differentials. Our results indicate that a positive 1 percentage point inflationary differential between individual country and the euro area itself translates into 1.7 percentage point increase in overvaluation of the individual country’s real exchange rate. We also show the extent of overvaluation in peripheral countries of the euro area has been increasing since mid-2000s. At the end of observed period this trend partially stopped due to emergence of falling prices in these economies. We discuss implications of such reversal and conclude deflation in peripheral countries of t he euro area might be helpful when restoring its competitiveness. |
| Keywords: | real exchange rates, misalignment, euro area, panel data, inflationary differentials |
| JEL: | C21 E31 F31 F45 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2016_11&r=opm |
| By: | Harold Cole; Daniel Neuhann; Guillermo Ordoñez |
| Abstract: | What a country has done in the past, and what other countries are doing in the present, can feedback for good or for ill in debt markets. We develop a simple model of sovereign bond markets with global investors and endogenous information acquisition about fundamental default probabilities. This model displays hysteresis and contagion in sovereign bond spreads. Small fundamental shocks in one country can induce investors to acquire information, generating price volatility and increased risk premia. These changes may also induce investors to rebalance their portfolio, generating market segmentation and information acquisition in seemingly unrelated economies. Information regimes may persist over time, requiring large improvements in fundamentals to return to more stable bond spread conditions. |
| JEL: | F34 F42 G15 H63 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22330&r=opm |
| By: | Gauti B. Eggertsson; Neil R. Mehrotra; Sanjay R. Singh; Lawrence H. Summers |
| Abstract: | Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation. |
| JEL: | E31 E32 E52 F33 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22299&r=opm |
| By: | Fan, Jingting; Kalemli-Ozcan, Sebnem |
| Abstract: | One of the explanations for global imbalances is the self-financing behavior of credit-constrained firms in rapidly growing emerging markets. We use an extensive firm-level data set from several Asian countries during 2002-2011, and test the micro foundation of this theory by estimating the effect of an exogenous change in credit constraints, resulting from financial reforms, on firms' saving behavior. As predicted, after financial reforms, firms who were credit-constrained previously decreased their savings more (or increased their savings less) relative to unconstrained firms. However, this firm-level effect did not lead to a decrease in aggregate corporate savings as conjectured by the theory. Our sector level regressions show that corporate savings increased after financial reforms, and more so for sectors more dependent on external finance. The current account surpluses also did not register a significant deterioration after financial reforms, consistent with our findings on sectoral and aggregate corporate savings. |
| JEL: | D24 E22 F41 O16 O47 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11314&r=opm |
| By: | Nuguer Victoria; Cuadra Gabriel |
| Abstract: | We develop a two-country DSGE model with global banks to analyze the role of cross-border banking flows on the transmission of a quality of capital shock in the United States to emerging market economies (EMEs). Banks face a moral hazard problem for borrowing from households. EME's banks might be risky: they can also be constrained to borrow from U.S. banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macroprudential policy that targets non-core liabilities makes the domestic economy resilient to the volatility of cross-border banking flows and makes EME's households better-off. |
| Keywords: | Global banking; emerging market economies; financial frictions; macroprudential policy. |
| JEL: | G28 E44 F42 G21 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2016-06&r=opm |
| By: | Ahmet Sensoy; Benjamin M. Tabak |
| Abstract: | We use generalized Hurst exponents to investigate long-range dependence across countries that have implemented an in ation targeting monetary policy regime and have a oating currency regime. We show that the degree of long-range dependence has changed after the 2008 crisis for equity markets but not as much for exchange rate markets. We compare results for developed and emerging economies and find that there still are some important differences but not as they were before the crisis. We also include an additional set of relevant countries and nd that our results are more pronounced for in ation targeters. We discuss several implications of these results. |
| Keywords: | Hurst exponent, market eciency, exchange rate, stock market, emerging markets, developed markets |
| JEL: | C65 F31 G01 G14 G15 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:bor:wpaper:1632&r=opm |