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on Open Economy Macroeconomics |
| By: | Montoro, Carlos (Banco Central de Reserva del Perú; Concejo Fiscal (CF)); Ortiz, Marco (Banco Central de Reserva del Perú) |
| Abstract: | In this paper we extend a new Keynesian open economy model to include risk-averse FX dealers and FX intervention by the monetary authority. These ingredients generate deviations from the uncovered interest parity (UIP) condition. More precisely, in this setup portfolio decisions of the dealers add endogenously a time variant risk-premium element to the traditional UIP that depends on FX intervention by the central bank and FX orders by foreign investors. We analyse the effectiveness of different strategies of FX intervention (e.g.,unanticipated operations or via a preannounced rule) to affect the volatility of the exchange rate and the transmission mechanism of the interest rate. Our findings are as follows: (i) FX intervention has a strong interaction with monetary policy in general equilibrium; (ii) FX intervention rules can have stronger stabilisation power than discretion in response to shocks because they exploit the expectations channel; and (iii) there are some trade-offs in the use of FX intervention, since it can help to isolate the economy from external financial shocks, but it prevents some necessary adjustments on the exchange rate as a response to nominal and real external shocks. |
| Keywords: | Foreign exchange Microestructure, Exchange rate dynamics, Exchange Rate Intervention, Monetary policy, Information Heterogeneity |
| JEL: | E4 E5 F3 G15 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2016-008&r=opm |
| By: | Senay, Ozge; Sutherland, Alan |
| Abstract: | Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks. |
| Keywords: | Collateral constraints; Country portfolios; Financial market structure; Optimal monetary policy |
| JEL: | E52 E58 F41 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11499&r=opm |
| By: | Hameed, Allaudeen; Rose, Andrew K |
| Abstract: | This paper examines exchange rate behavior during the recent period with negative nominal interest rates. We use a daily panel of data of 61 currencies from Jan 2010 through May 2016; during this time five economies (Denmark, EMU, Japan, Sweden, and Switzerland) experienced negative nominal interest rates. We examine both effective exchange rates and bilateral rates, the latter typically measured against the Swiss franc since Switzerland has had the longest period of negative nominal rates. We examine exchange rate volatility, exchange rate changes, deviations from uncovered interest parity, and profits from the carry trade. We find that negative interest rates seem to have little effect on observable exchange rate behavior. |
| Keywords: | carry; daily; data; deviation; interest; nominal; parity; Trade; uncovered; volatility |
| JEL: | F31 G15 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11498&r=opm |
| By: | Vincent Duwicquet (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS - Centre National de la Recherche Scientifique - Université de Lille, Sciences et Technologies); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The euro crisis sheds light on the nature of alternative adjustment mechanisms in a heterogeneous monetary union. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro remains overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially for Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone thanks to a FEER approach. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds. Overvaluations amount to negative competitiveness shocks in Southern countries. In this respect, three main results are found. Firstly, an increase of intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact with a public debt limited to 70 percent of GDP. Thirdly, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account balances. |
| Keywords: | Euro crisis,Exchange rate misalignments,Eurobonds,Interest rates |
| Date: | 2016–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01359820&r=opm |
| By: | Marta Gómez-Puig (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Javier Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.) |
| Abstract: | This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth model augmented for public debt using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our findings tend to support the view that public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive depending on the country. |
| Keywords: | Public debt; Economic growth; Bounds testing; Euro area; Peripheral EMU countries; Central EMU countries. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:wpaper:1602&r=opm |
| By: | luo, yinghao |
| Abstract: | After the collapse of the Bretton Woods system, the evidence on the purchasing power parity (PPP) in the long run is still a matter of debate. The difficulties of the problem are the possible nonstationarity of relative price indices and nominal exchange rates. The traditional ways to deal with nonstationarity such as unit root model and cointegration have some problems. In this paper, to deal with nonstationarity, we apply the Hodrick－Prescott(HP) trend-cycle filter in real business cycle literature (Hodrick and Prescott，1981) which can give a nonlinear smooth-trend, and we find that after the 1970s float, the monthly HP trends of US dollar/UK sterling and Deutsche marks/US dollar have certain relevance with their corresponding HP trends of relative consumer price indices. This result indicates that there is no strong evidence to directly deny that the PPP is valid in the long run. In this sense, it is not reliable to directly deny the belief of monetary neutrality! |
| Keywords: | HP filter, purchasing power parity, monetary neutrality |
| JEL: | E5 F3 F31 F37 |
| Date: | 2016–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73817&r=opm |
| By: | Moyen, Stéphane; Stähler, Nikolai; Winkler, Fabian |
| Abstract: | We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercylical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers. |
| Keywords: | Unemployment Insurance,International Business Cycles,Fiscal Union,International Risk Sharing |
| JEL: | E32 E62 H21 J64 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:332016&r=opm |
| By: | Rühl, Christian |
| Abstract: | Studies employing micro price data suggest that price dispersion is larger between regions in different countries than between regions in the same country. To investigate the strength of this border effect, deviations from the law of one price are used in most studies to provide statistical evidence on the effect of borders on price dispersion. I propose an alternative measure of the economic costs of borders which has an explicitwelfare-theoretic foundation. Employing a unique micro price data set from households in Belgium, Germany and the Netherlands I provide evidence on the economic importance of price differences for households. I find that price dispersion within countries has only small economic importance, but that price dispersion between Belgium andGermany (and Belgium and theNetherlands) has considerable economic importance. |
| Keywords: | border effects,goods market integration,welfare effects,international price dispersion |
| JEL: | D12 D61 F45 F61 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:535&r=opm |
| By: | Filipe Campante; David Yanagizawa-Drott |
| Abstract: | We study the impact of international long-distance flights on the global spatial allocation of economic activity. To identify causal effects, we exploit variation due to regulatory and technological constraints which give rise to a discontinuity in connectedness between cities at a distance of 6000 miles. We show that these air links have a positive effect on local economic activity, as captured by satellite-measured night lights. To shed light on how air links shape economic outcomes, we first present evidence of positive externalities in the global network of air links: connections induce further connections. We then find that air links increase business links, showing that the movement of people fosters the movement of capital. In particular, this is driven mostly by capital flowing from high-income to middle-income (but not low-income) countries. Taken together, our results suggest that increasing interconnectedness generates economic activity at the local level by inducing links between businesses, but also gives rise to increased spatial inequality locally, and potentially globally. |
| JEL: | F15 F21 F23 F63 O11 O18 O19 O47 R11 R12 R40 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22653&r=opm |
| By: | Gourinchas, Pierre-Olivier; Rey, Hélène |
| 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 trade-off 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. |
| Keywords: | real interest rates; secular stagnation; Triffin dilemma |
| JEL: | F3 F41 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11503&r=opm |
| By: | Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia |
| Abstract: | Studies employing micro price data to examine the extent of international goods market integration tend to find that borders induce arbitrage-impeding transaction costs which contribute to segment national markets. Analyzing household scanner price data from the three euro area countries Belgium, Germany and Netherlands, we document that Belgian households living in the vicinity of the border to Netherlands pay almost 10% more for the same good as their Dutch counterparts. German consumers on the other hand face prices that are on average up to around 3% smaller than those in the neighboring Netherlands. Counterfactual evidence for within-country price discontinuities provides no evidence of any existing border effects. The induced costs of crossing national borders amount to at least 13%. We also find evidence on border discontinuities in various household preference characteristics (such as demand elasticities and goods valuation) and household shopping patterns such as shopping frequencies. |
| Keywords: | goods market integration,international price setting,border effects,price discrimination,demand elasticities,habit formation,scanner price data |
| JEL: | D12 D40 F40 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:536&r=opm |
| By: | Jean-Louis COMBES (Cerdi - Université d'Auvergne); Patrick PLANE (Cerdi); Tidiane KINDA (FERDI); Rasmané OUEDRAOGO (FERDI) |
| Abstract: | This paper assesses the impact of capital inflows and the composition on the real exchange rate and economic growth in developing countries. Capital inflows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth through the appreciation of the real exchange rate. We employ the Generalized Method of Moments (GMM) for dynamic panel data to deal with the endogeneity bias. Using a large sample of 77 low- and middle-income countries over the period 1980-2012, the results clearly show that capital inflows affect directly and indirectly economic growth. Our main findings are as follows:- (i) a 1 percent increase in total net capital inflows appreciates the real exchange rate by 0.5 percent; (ii) the real exchange rate appreciation effect of remittances is twice as big as the effect of aid, and ten times bigger than the effect of FDI; (iii) overall, capital inflows are associated with higher economic growth after netting out the negative impact of real exchange rate appreciation. Doubling capital inflows per capita would increase growth by about 50, resulting in a gain of roughly 2 additional percentage points on top of the 3.7percent annual growth rate observed within the sample over the period 1980-2012. Keywords : Capital inflows, real exchange rate dynamics, economic growth |
| Keywords: | Capital inflows, real exchange rate dynamics, economic growth |
| JEL: | F3 F4 O4 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:fdi:wpaper:3079&r=opm |
| By: | Hamzeh Arabzadeh (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne, CES and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | This paper contributes to the literature on current account imbalances. Econometric analysis of the paper finds evidence that wage centralization, in a cross-section of industrialized economies, significantly improve current accounts through reducing budget deficits. To explain this empirical finding, the paper provides a political economy framework in which the government follows preferences of N-sector workers (majority rule). An increase in public and so, current account deficits by issuing external public debt leads to real appreciation of the currency. As between-sector mobility is constrained by friction in the labor market, wages in N-sector rises. The opposite happens if the government improves the two balances by rising its saving. Thus, N-sector workers relatively support (oppose) more a rise (reform) in the two deficits. Centralization of wage bargaining moderates the benefit and costs from such twin-deficit policies by reducing the responsiveness of sectoral wage with respect to sectoral prices. Thus, the more centralized is the wage determination, the less N-sector workers support (oppose) a rise (reform) in the two deficits. Correspondingly, more centralized wage bargaining reduces the government's political incentive (cost) to deteriorate (reform) the external balance through the fiscal balance. |
| Keywords: | Twin deficits, Current account imbalances, Dutch disease, Search and Match, Wage bargaining Centralization, Real Exchange rate |
| JEL: | F32 E62 J31 J51 J6 F41 |
| Date: | 2016–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2016017&r=opm |
| By: | Paula Lourdes Hernández Verme (Universidad de Guanajuato); Mónica Karina Rosales Pérez (Universidad de Guanajuato) |
| Abstract: | There was nothing in the fundamentals of the Mexican economy that would suggest at the moment the beginning of a crisis of such magnitude. The 1994 crisis was extremely unexpected for households and domestic and foreign firms, because there were good economic indicators so far, together with the financial stability of the previous years. The Mexico of 1994 had a de jure fixed exchange rate regime, but in practice, it was an intermediate peg, not a serious hard peg. Our goal is to try to find out whether things would have been different if there would have been instead either a floating exchange rate regime or a hard peg in Mexico at the time of the crisis of 1994. In our aim at trying to answer this question, we set up a Dynamic Stochastic General Equilibrium Model (DSGE) that shared the main stylized characteristics of the Mexican economy of that time. We considered a pure exchange, monetary, small open economy with a DSGE framework in discrete time that obtains from micro-foundations. |
| Keywords: | exchange rate regimes, sudden stops of international capital, bank panics, dynamic stochastic general equilibrium, monetary policy, small open economy |
| JEL: | E13 E52 E58 F33 G21 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2016-074&r=opm |