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on Open Economy Macroeconomics |
| By: | Frankel, Jeffrey (Harvard University) |
| Abstract: | After a 30-year absence, calls for international coordination of macroeconomic policy are back. This time the issues go by names like currency wars, taper tantrums, and fiscal compacts. In traditional game theory terms, the existence of spillovers implies that countries are potentially better off if they coordinate policies than under the Nash non-cooperative equilibrium. But what is the nature of the spillover and the coordination? The paper interprets recent macroeconomic history in terms of four possible frameworks for proposals to coordinate fiscal policy or monetary policy: the locomotive game, the discipline game, the competitive depreciation game (currency wars) and the competitive appreciation game. (The paper also considers claims that monetary coordination has been made necessary by the zero lower bound among advanced countries or financial imperfections among emerging markets.) Perceptions of the sign of spillovers and proposals for the direction of coordination vary widely. The existence of different models and different domestic interests may be as important as the difference between cooperative and non-cooperative equilibria. In some cases complaints about foreigners' actions and calls for cooperation may obscure the need to settle domestic disagreements. |
| JEL: | F42 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:16-002&r=opm |
| By: | van der Ploeg, Frederick |
| Abstract: | Policy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis: none of the windfall is invested at home and saving in an intergenerational SWF is dictated by smoothing consumption across different generations. Furthermore, with Dutch disease effects the optimal response is to intertemporally smooth the real exchange rate, smooth public and private consumption, and limit sharp fluctuations in the intersectoral allocation of production factors. We show that these prescriptions need to be modified for the following reasons. First, to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund. Second, with imperfect access to capital markets the windfall must be used to curb capital scarcity, invest domestically and bring consumption forward. Third, with real wage rigidity consumption must also be brought forward to mitigate transient unemployment. Fourth, the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall. Fifth, with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile. Finally, with nominal wage rigidity we show that a Taylor rule is a better short-run response to a crash in commodity prices than a nominal exchange rate peg. |
| Keywords: | absorption constraints; capital scarcity; Dutch disease; Overlapping Generations; permanent income |
| JEL: | E60 F34 F35 F43 H21 H63 O11 Q33 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11520&r=opm |
| By: | McQuade, Peter; Schmitz, Martin |
| Abstract: | This paper highlights a recent ‘great moderation’ in global capital flows, characterised by smaller volumes and lower volatility of cross-border transactions. However, there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005-06, immediately prior to the onset of the global financial crisis, to the post-crisis period of 2013-14, when global flows arguably settled at a ‘new normal’. We find that since the pre-crisis period, gross capital inflows recovered more for economies with smaller pre-crisis external and internal imbalances, lower per capita income, improving growth expectations, a less severe impact of the global financial crisis and less stringent macroprudential policy. On the asset side, countries with a more accommodative monetary policy, a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post-crisis period. JEL Classification: F15, F21, F32 |
| Keywords: | external imbalances, global financial crisis, international capital flows, monetary |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161952&r=opm |
| By: | Reinhart, Carmen (Harvard University); Trebesch, Christoph (University of Munich) |
| Abstract: | A sketch of the International Monetary Fund's 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a "demand driven" theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively "new" IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became they key focus since the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in the developing nations and now migrated to advanced ones. As a consequence, the IMF has engaged in "serial lending", with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency, most widespread among low income countries in chronic arrears to the official sector, but most evident in the case of Greece since 2010. We conclude that these practices impair the IMF's role as an international lender of last resort. |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:15-077&r=opm |
| By: | Chang Shu; Dong He; Jinyue Dong; Honglin Wang |
| Abstract: | This paper compares spillovers from the US and Chinese financial markets to the rest of Asia-Pacific. Structural VAR analysis points to the growing influence of Chinese equities and currency movements. In normal times China's influence in the equity market has risen to a level close to that of the United States, although the relative impact of the United States became stronger in crisis periods. Nonetheless, China's bond market remains a negligible player. The influence of China may be interpreted as a "regional pull" factor, while that of the United States remains a key "global push" factor. |
| Keywords: | China's impact, spillovers to Asian financial markets, US, structural VAR, sign restrictions |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:579&r=opm |
| By: | Metiu, Norbert; Hilberg, Björn; Grill, Michael |
| Abstract: | This paper investigates whether credit constraints in the US economy amplify the international propagation of US financial shocks. We model the dynamics of the US economy jointly with global macroeconomic and financial variables using a threshold vector autoregression. This model captures regime-specific dynamics conditional on the severity of credit constraints in the US economy. We identify three main episodes of tight credit in US financial history over the past thirty years. These occur in the late-1980s, in the early 2000s, and during the 2007-09 financial crisis. We find that US financial shocks are associated with a significant contraction in global economic activity in times of tight credit. By contrast, there is little impact of US financial shocks on the global economy in normal times. This asymmetry highlights an international dimension of the US financial accelerator mechanism. JEL Classification: C32, C34, E32, G01, F44 |
| Keywords: | financial frictions, financial shocks, nonlinear dynamics, spillover |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161954&r=opm |
| By: | Özyurt, Selin |
| Abstract: | This study investigates the degree and speed of the exchange rate pass through (ERPT) into extra-euro area import prices for the euro area aggregate and the five largest countries. Based on quarterly frequency data, the analysis covers the period 1996Q1-2015Q2. Two alternative measures of the nominal exchange rate are used: the NEER of the euro against 38 partners and the EUR/USD bilateral exchange rate. The results show that the pass through is only “partial” in the euro area, most probably reflecting slow nominal price adjustments and the pricing-to-market behaviour of firms. We find clear evidence that the degree of pass through has been declining over the past two decades. Interestingly, the period of strong fall of pass through coincides with the increasing share of the emerging countries in world trade and the accession of China to the WTO. Looking at the largest euro area countries, we find striking heterogeneities in the degree but also in the speed of the ERPT. The lowest degree of pass through of a change in NEER is found for Germany while it is the highest for Italy. In addition, unlike the other large euro area countries, we do not find evidence for Italy of a decline in the degree of pass through over time. In a monetary union, such differences may signal large heterogeneities in domestic markets structures. JEL Classification: E31, F3, F41 |
| Keywords: | euro area, Exchange rate pass-through, Import prices, Pricing to market |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161955&r=opm |
| By: | Lambrias, Kyriacos |
| Abstract: | We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The novelty of our paper is twofold. First, we allow for imperfect substitutability of capital which significantly reinforces Harrold-Balassa-Samuelson effects, producing more empirically relevant movements in real exchange rates. Second, we introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through movements in relative hours across countries, while being consistent with expectations-driven economic expansions. JEL Classification: F41, F44 |
| Keywords: | Backus-Smith Puzzle, news-driven cycles, real-exchange rates |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161946&r=opm |
| By: | Martina Jašová; Richhild Moessner; Előd Takáts |
| Abstract: | We study how exchange rate pass-through to CPI inflation has changed since the global financial crisis. We have three main findings. First, exchange rate pass-through in emerging economies decreased after the financial crisis, while exchange rate pass-through in advanced economies has remained relatively low and stable over time. Second, we show that the declining pass-through in emerging markets is related to declining inflation. Third, we show that it is important to control for non-linearities when estimating exchange rate pass-through. These results hold for both short-run and long-run pass-through and remain robust to extensive changes in the specifications. |
| Keywords: | Exchange rate pass-through, inflation |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:583&r=opm |
| By: | N. Bokan; A. Gerali; Sandra Gomes; P. Jacquinot; P. Pisani |
| Abstract: | We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features - together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks - allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union. |
| JEL: | E51 E32 E44 F47 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201610&r=opm |