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on Open Economy Macroeconomics |
| By: | Pierre-Olivier Gourinchas; Hélène Rey |
| Abstract: | The current environment is characterized by low real rates and by policy rates close to or at their lower bound in all major financial areas. We analyze these unusual economic conditions from a historical perspective and draw some implications for external imbalances, safe asset demand and the process of external adjustment. First, we decompose the fluctuations in the world consumption wealth ratio over long period of times and show that they anticipate movements of the real rate of interest. Second, our estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time. In this context, we argue that there is a renewed Triffin dilemma where safe asset providers face a trade-off in terms of external exposure and real appreciation of their currency. This tradeoff is particularly acute for smaller economies. This is the ‘curse of the regional safe asset provider.’ We discuss how this ‘curse’ is playing out for two prominent regional safe asset providers: core EMU and Switzerland. |
| JEL: | E2 E4 F4 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22618&r=opm |
| By: | Leduc, Sylvain; Moran, Kevin; Vigfusson, Robert J. |
| Abstract: | We show that a model where investors learn about the persistence of oil-price movements accounts well for the fluctuations in oil-price futures since the late 1990s. Using a DSGE model, we then show that this learning process alters the impact of oil shocks, making it time-dependent and consistent with the muted impact oil-price changes had on macroeconomic outcomes during the early 2000s and again over the past two years. The Spring 2008 increase in oil prices had a larger impact because market participants considered that it was likely driven by permanent shocks. |
| Keywords: | Kalman filter ; Time-variation ; Inventories ; Conditional response |
| JEL: | E32 E37 Q43 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1179&r=opm |
| By: | Rudolfs Bems; Julian di Giovanni |
| Abstract: | This paper shows that an income effect can drive expenditure switching between domestic and imported goods. We use a unique Latvian scanner-level dataset, covering the 2008-09 crisis, to document several empirical findings. First, expenditure switching accounted for one-third of the fall in imports, and took place within narrowly-defined product groups. Second, there was no corresponding within-group change in relative prices. Third, consumers substituted from expensive imports to cheaper domestic alternatives. These findings motivate us to estimate a model of non-homothetic consumer demand, which explains two-thirds of the observed expenditure switching. Estimated switching is driven by income, not changes in relative prices. |
| Keywords: | expenditure switching, relative price adjustment, crisis, income effect |
| JEL: | F1 F3 F4 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:922&r=opm |
| By: | Robert Kollmann (ECARES, Université Libre de Bruxelles & CEPR) |
| Abstract: | This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of the real exchange rate, consumption and net foreign assets, in a two country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble those of volatility shocks. In a recursive preferences-complete markets framework, volatility and risk appetite shocks account for a noticeable share of the fluctuations of the real exchange rate, net exports and net foreign assets. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption growth and the real exchange rate. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:721&r=opm |
| By: | Cécile Couharde; Carl Grekou |
| Abstract: | This paper re-examines empirically the relationship between exchange rate regimes and currency misalignments in emerging and developing countries. Using alternative de facto exchange rate regime classifications over the period 1980-2012, it finds strong evidence that performance of exchange rate regimes is conditional on the de facto classification. In particular, this paper shows that the effect of monetary arrangements on currency misalignments depends critically on the ability of these classification schemes to capture adequately dysfunctional monetary regimes. |
| Keywords: | Currency misalignments; Exchange rate regimes; Emerging and developing countries. |
| JEL: | C23 F31 F33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2016-31&r=opm |
| By: | Cesa-Bianchi, Ambrogio (Bank of England); Thwaites, Gregory (Bank of England); Vicondoa, Alejandro (European University Institute) |
| Abstract: | This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any endogenous response to macroeconomic variables. |
| Keywords: | Monetary policy transmission; external instrument; high-frequency identification; structural VAR; local projections |
| JEL: | E31 E32 E43 E44 E52 E58 |
| Date: | 2016–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0615&r=opm |
| By: | Kodila-Tedika, Oasis; Asongu, Simplice; Cinyabuguma, Matthias |
| Abstract: | Using cross-country differences in the degree of isolation before the advent of technologies in sea and air transportation, we assess the relationship between geographic isolation and financial development across the globe. We find that pre-historic geographical isolation has been beneficial to development because it has contributed to contemporary cross-country differences in financial development. The relationship is robust to alternative samples, different estimation techniques, outliers and varying conditioning information sets. |
| Keywords: | Financial development; Isolation; Agglomeration; Globalization |
| JEL: | F15 G15 N7 O16 O50 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73687&r=opm |
| By: | Duygu Yolcu Karadam (Department of Economics, Pamukkale University); Erdal Özmen (Department of Economics, METU) |
| Abstract: | This paper empirically investigates the impact of real exchange rates (RER) on growth of a large number of advanced (AE) and developing economies (DE) by employing the recent non-stationary panel data estimation procedures to estimate conventional growth models augmented with global financial and monetary conditions variables. Our results suggest that, the expansionary depreciation findings for DE are often based on a misinterpretation of an error correction mechanism coefficient. We find that external variables representing global financial and monetary conditions are strongly significant in explaining growth in DE along with the conventional variables including trade openness, human capital, domestic savings. Our data support the view that RER depreciations are contractionary for DE with high external debt and expansionary for AE. Higher trade openness enhances the contractionary impact of RER depreciations in both AE and DE. These results are found to be robust for different RER and per capita real income measures. |
| Keywords: | Balance Sheets, Developing economies, Exchange rates, Growth |
| JEL: | F30 F41 F60 F65 O11 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1609&r=opm |
| By: | SEKINE Atsushi; TSURUGA Takayuki |
| Abstract: | Since the 2000s, large fluctuations in commodity prices have become a concern among policymakers regarding price stability. This paper investigates the effects of commodity price shocks on headline inflation with a monthly panel consisting of 144 countries. We show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects are fairly robust, suggesting a low risk of the so-called second-round effect on inflation. Employing the smooth transition autoregressive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks could be persistent, depending on inflation regimes. In this specification, commodity price shocks may not have transitory effects when a country's currency is pegged to the U.S. dollar. However, the effect remains transitory in countries with exchange rate flexibility. JEL Classification: E31, E37, Q43 |
| Keywords: | Commodity prices, inflation, pass-through, local projections, smooth transition |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:esj:esridp:331&r=opm |
| By: | Christian Rohe |
| Abstract: | I analyze the symmetry of economic shocks in South America by comparing the volatility of unexpected changes in bilateral real exchange rates within an existing monetary union, the intra-Brazilian currency area, with the volatility found in real exchange rates between Brazilian regions and nine South American countries for the 1994-2013 time period. My results show that shocks across South America are substantially less symmetric than shocks within Brazil, indicating potentially high costs if a continent-wide monetary union should eliminate nominal exchange rate exibility between countries. |
| Keywords: | Optimum currency area, Real exchange rates, Monetary union |
| JEL: | F31 F33 O54 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:5316&r=opm |
| By: | Idrisov, Georgy (Gaidar Institute for Economic Policy); Ponomarev, Yury (Russian Presidential Academy of National Economy and Public Administration (RANEPA); Gaidar Institute for Economic Policy); Pleskachev, Yury Andreevich (Russian Presidential Academy of National Economy and Public Administration (RANEPA)) |
| Abstract: | The paper presents the results of research and assessment of the combined exchange rate and import duty pass-through effect in the Russian economy and its key features. We used data on the basic macroeconomic indicators, published by the Central Bank of the Russian Federation and the Federal State Statistics Service, Federal Customs Service, as well as scientific, analytical and statistical publication of Russian and foreign sources, including international organizations. |
| Keywords: | exchange rate, import duty, economy |
| Date: | 2016–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:1666&r=opm |
| By: | Ghosh, Atish R. (Asian Development Bank Institute); Qureshi, Mahvash S. (Asian Development Bank Institute) |
| Abstract: | While capital flows to emerging markets bring numerous benefits, they are also known to create macroeconomic imbalances (economic overheating, currency overvaluation) and increase financial vulnerabilities (domestic credit growth, bank leverage, foreign currency-denominated lending). But are all inflows the same? In this paper, we examine whether the source of the inflow—residents repatriating foreign assets or nonresidents investing in the country—or the type of inflow (foreign direct investment, portfolio, other investment) makes any difference to the consequences of the capital flow. Our results, based on a sample of 53 emerging markets over 1980–2013, show that when it comes to the source of the inflow, the macroeconomic and financial-stability consequences of flows driven by residents (asset flows) and nonresidents (liability flows) are broadly similar in economic terms. Formal statistical tests, however, suggest that liability flows are more prone to causing economic overheating and domestic credit expansion than asset flows. On the types of inflows, we find that compared to direct investment, portfolio debt and other investment flows are associated with larger macroeconomic imbalances and financial vulnerabilities. We conclude that policy should try to mitigate the untoward consequences of inflows, and shift their composition from risky to safer forms of liabilities. |
| Keywords: | capital flow; emerging markets; macroeconomics; economic overheating; credit expansion; currency; overvaluation; domestic credit; bank leverage; foreign currency; lending; FDI; foreign direct investment; investment; financial stability; asset flow; liability flow; portfolio debt |
| JEL: | F21 F32 F38 F41 F42 F62 |
| Date: | 2016–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0585&r=opm |
| By: | Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (PSL - PSL Research University, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine) |
| Abstract: | In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries. |
| Keywords: | Bayesian Estimation,DSGE Two-Country Model,Macroprudential policy,Euro Area,Financial Accelerator |
| Date: | 2016–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01315085&r=opm |
| By: | Wenxin Du; Carolin E. Pflueger; Jesse Schreger |
| Abstract: | Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption-smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency. |
| JEL: | E4 F3 G12 G15 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22592&r=opm |
| By: | Takao Fujii (Kobe University of Foreign Studies); Yoichi Matsubayashi (Graduate School of Economics, Kobe University) |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1626&r=opm |
| By: | Junichi Fujimoto (National Graduate Institute for Policy Studies); Junsang Lee (Sungkyunkwan University) |
| Abstract: | This paper examines efficient risk sharing under limited commitment and search frictions. The model features a social planner and a continuum of risk-averse workers, where the planner is able to provide consumption only to workers matched with the planner and faces an aggregate resource constraint, while workers can walk away from the match in any period and search for a new match. The formation of new matches and the exogenous destruction of existing ones substantially expand the set of feasible stationary allocations, providing a role for the social welfare function. In the benchmark case of the Benthamite social welfare function, we find that the efficient stationary allocation exhibits novel consumption dynamics: Consumption begins at a relatively low level, converges toward a certain level when the participation constraint is slack, and jumps up when it binds. We then explore the role of limited commitment in generating such rich consumption dynamics. |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:16-15&r=opm |