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on Open Economy Macroeconomics |
| By: | Kan Chen; Mario Crucini |
| Abstract: | Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach. |
| JEL: | C55 C68 F41 F44 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22460&r=opm |
| By: | Giancarlo Corsetti; Keith Kuester; Gernot J. Müller |
| Abstract: | We analyze macroeconomic stabilization in a small open economy which faces a large recession in the rest of the world. We show analytically that for the economy to remain isolated from the external shock, the exchange rate must depreciate not only upfront, to offset the collapse in external demand, but also persistently to decouple domestic prices from deflation in the rest of the world. If monetary policy becomes constrained by the zero lower bound, the scope of exchange rate depreciation is limited and the economy is no longer isolated from the shock. Still, in this case there is a "benign coincidence": fiscal policy is particularly effective in stabilizing economic activity. Under fixed exchange rates, instead, the impact of the external shock is particularly severe and the effectiveness of fiscal policy limited. |
| Keywords: | External shock, Great Recession, Exchange rate, Zero lower bound, Fiscal Multiplier, External-demand multiplier, Benign coincidence |
| JEL: | F41 F42 E32 |
| Date: | 2016–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1644&r=opm |
| By: | Jordi Galí; Tommaso Monacelli |
| Abstract: | We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union. |
| JEL: | E32 E52 F41 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22489&r=opm |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight. |
| JEL: | E44 F41 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22481&r=opm |
| By: | Pierre-Olivier Gourinchas; Thomas Philippon; Dimitri Vayanos |
| 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. |
| JEL: | N0 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67368&r=opm |
| By: | Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM)); Jean Imbs (Paris School of Economics; Centre for Economic Policy Research (CEPR)); Jumana Saleheen (Bank of England) |
| Abstract: | In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (e.g., where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But finance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks. |
| Keywords: | Financial linkages, Business cycles synchronization, Contagion, Common shocks, Idiosynchratic shocks |
| JEL: | E32 F15 F36 G21 G28 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1622&r=opm |
| By: | Vahagn Galstyan; Philip R. Lane; Caroline Mehigan; Rogelio Mercado |
| Abstract: | Research on the geographical distribution of international portfolios has mainly focused on data aggregated to the country level. We exploit newly-available data that disaggregates the holders and issuers of international securities along sectoral lines. We find that patterns evident in the aggregate data do not uniformly apply across the various holding and issuing sectors, such that a full understanding of cross-border portfolio positions requires granular-level analysis. |
| JEL: | F21 F3 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22466&r=opm |