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on Open Economy Macroeconomics |
| By: | Aleksejs Krecetovs (Imperial College London); Pasquale Della Corte (Imperial College London) |
| Abstract: | This paper studies empirically the relation between macro uncertainty shocks and the cross-section of currency excess returns. We measure uncertainty over macro variables such as current account, inflation rate, short-term interest rate, real economic growth and foreign exchange rate using the cross-sectional dispersion of market participants’ expectations from two international surveys of macro forecasts. We ï¬ nd evidence that investment currencies deliver low returns whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. In contrast, uncertainty over other macro indicators displays no signiï¬ cant relation with the cross-section of currency excess returns. Our results are consistent with a recent theory of exchange rate determination based on capital flows in imperfect ï¬ nancial markets. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:624&r=opm |
| By: | Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss |
| Abstract: | Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested. |
| Keywords: | Economic conditions;Small open economies;Monetary policy;Central bank autonomy;Central banking and monetary issues;Spillovers;Vector autoregression;Econometric models;Monetary policy; monetary conditions; autonomy; global financial cycle. |
| Date: | 2016–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/108&r=opm |
| By: | Gino Gancia; Paolo Epifani |
| Abstract: | We study the welfare e¤ects of trade imbalances in a two-sector model of monopolistic competition. As in perfect competition, a trade surplus involves an income transfer to the deficit country and possibly a terms-of-trade deterioration. Unlike the conventional wisdom, however, trade imbalances do not impose any double burden on surplus countries. This is because of a production-delocation effect, which leads to a reduction in the local price index. In the presence of intermediate goods, new results arise: A trade surplus may lead to an appreciation of the exchange rate, to a terms-of-trade improvement and even to a welfare increase. Numerical simulations show that, under realistic assumptions about preferences and technology, the beneficial price-index effect can significantly reduce the direct cost of the transfer. |
| Keywords: | trade imbalances, trade costs, monopolistic competition, intermediate goods |
| JEL: | F1 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:864&r=opm |
| By: | Olivier Cardi; Peter Claeys; Romain Restout |
| Abstract: | This paper develops a two-sector open economy model with imperfect mobility of labor across sectors in order to account for time-series evidence on the aggregate and sectoral effects of a government spending shock. Using a panel of sixteen OECD coun- tries over the period 1970-2007, our VAR evidence shows that a rise in government consumption i) increases hours worked and GDP and produces a simultaneous decline in investment and the current account, ii) increases non traded output relative to GDP and thus its output share (in real terms) and lowers the output share of tradables, and iii) causes both the relative price and the relative wage of non tradables to appreciate. While the second set of findings reveals that the government spending shock is biased toward non tradables and triggers a shift of resources for this sector, the third find- ing indicates the presence of labor mobility costs, thus preventing wage equalization across sectors. Turning to cross-country differences, empirically we detect a positive relationship between the magnitude of impact responses of sectoral output shares and the degree of labor mobility across sectors. Our quantitative analysis shows that our empirical findings for aggregate and sectoral variables can be rationalized as long as we allow for a difficulty in reallocating labor across sectors along with adjustment costs to capital accumulation. Finally, the model is able to generate a cross-country relationship between the degree of labor mobility and the responses of sectoral output shares which is similar to that in the data. |
| Keywords: | Fiscal policy; Labor mobility; Investment; Relative price of non tradables; Sectoral wages. |
| JEL: | E22 E62 F11 F41 J31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-39&r=opm |
| By: | Peter Fuleky (Department of Economics, University of Hawaii); Luigi Ventura (Department of Economics and Law, Sapienza, University of Rome); Qianxue Zhao (UHERO, University of Hawaii at Manoa) |
| Abstract: | Existing studies of international risk sharing rely on the highly restrictive assumption that all economies are characterized by symmetric preferences and uniform transmission of global shocks. We relax these homogeneity constraints by modeling aggregate and idiosyncratic fluctuations as unobserved components, and we use Pesaran's (2006) common correlated effects estimator to control for common factors and cross-sectional heterogeneity. We compare the proposed approach with the conventional ones using data from Penn World Table 9.0 for 120 countries. While we do not detect a significant increase in risk sharing during the last four decades, our results confirm that consumption is only partially smoothed internationally and risk sharing is directly related to the level of development. |
| Keywords: | International risk sharing, Consumption insurance, Panel data, Cross-sectional dependence, Heterogeneous effects |
| JEL: | C23 C51 E21 F36 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201612&r=opm |
| By: | Jan Gottschalk; Carl Miller; Lanieta Rauqeuqe; Isoa Wainiqolo; Yongzheng Yang |
| Abstract: | This paper provides an assessment of real exchange rate measures and their impact on trade performance with special reference to two Pacific island countries, Fiji and Samoa. The analysis shows that the commonly used CPI-based real effective exchange rate (REER) measure provides a useful starting point of assessment, but alternative measures based on other price and cost indices should be used to check the robustness of the results, particularly given the large impact of global commodity prices on small open economies. The paper also offers some illustrations of how to quantify the impact of exchange rate movements on trade, especially in the face of data constraints in small open economies. |
| Keywords: | Real exchange rates;Fiji;Samoa;Tourism;Demand;Real effective exchange rates;Balance of trade;Exports;Consumer price indexes;Exchange rate, trade, Pacific, Fiji, Samoa |
| Date: | 2016–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/168&r=opm |
| By: | Jasmin Sin |
| Abstract: | This paper studies the fiscal multiplier using a small-open-economy DSGE model enriched with financial frictions. It shows that the multiplier is large when frictions are present in domestic and international financial markets. The reason is that in the model government bonds are more liquid than private financial assets and that entrepreneurs face liquidity constraints. A bond-financed fiscal expansion eases these constraints and stimulates investment and hence growth. This mechanism, however, breaks down under the assumption of perfect international capital mobility, suggesting that conventional models which ignore the presence of frictions in international capital markets tend to underestimate the fiscal multiplier. |
| Keywords: | Fiscal stimulus and multipliers;Fiscal policy;Liquidity;Government expenditures;Small open economies;General equilibrium models;Sensitivity analysis;DSGE model, fiscal multiplier, small open economy, liquidity frictions |
| Date: | 2016–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/138&r=opm |
| By: | Cesa-Bianchi, Ambrogio (Bank of England); Imbs, Jean (Paris School of Economics); Saleheen, Jumana (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 (eg, 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; idiosyncratic shocks |
| JEL: | E32 F15 F36 G21 G28 |
| Date: | 2016–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0612&r=opm |
| By: | Vladimir Asriyan; Luca Fornaro; Alberto Martín; Jaume Ventura |
| Abstract: | We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents’ expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the inflation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy’s ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of “conventional” and “unconventional” monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades. |
| Keywords: | Bubbles, monetary policy, liquidity, traps, financial frictions |
| JEL: | E32 E44 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:921&r=opm |
| By: | Alexei P Kireyev; Andrei Leonidov |
| Abstract: | This paper proposes a network model of multilaterally equilibrium exchange rates. The model introduces a topological component into the exchange rate analysis, consistently taking into account simultaneous higher-order interactions among all currencies. The paper defines the currency demand indicator. On its base, it derives a multilateral exchange rate network, finds its dynamically stationary position, and identifies the multilaterally equilibrium levels of bilateral exchanges rates. Potentially, the model can be developed further to calculate the deviations of the observed bilateral exchange rates from their multilaterally equilibrium levels, which can be interpreted as their over- or undervaluation. For illustration, the model is applied to daily 1995-2016 exchange rates among 130 currencies sourced from the Thomson Reuters Datastream. |
| Keywords: | Exchange rates;Currencies;Supply and demand;Econometric models;Time series;exchange rate, networks, equilibrium, trade, network. |
| Date: | 2016–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/130&r=opm |