|
on Open Economy Macroeconomics |
| By: | IRC Task Force on IMF issues; L´Hotellerie-Fallois, Pilar; Moreno, Pablo; Balteanu, Irina; Beirne, John; Brüggemann, Axel; Bussière, Matthieu; Estrada, Ángel; Frost, Jon; Herzberg, Valerie; Metzemakers, Paul; Reinhardt, Dennis; Broos, Menno; Ghalanos, Michalis; Kennedy, Bernard; Landbeck, Alexander; Lerner, Christina; Menezes, Paula; Schiavone, Alessandro; Tilley, Thomas |
| Abstract: | The last decade has been characterised by the pronounced volatility of capital flows. While cross-border capital flows can have many benefits for both advanced and emerging market economies, they may also carry risks, which require appropriate policy responses. Disentangling the push from the pull factors driving capital flows is key to designing appropriate policies to deal with them. Strong institutions, sound fundamentals and a large domestic investor base tend to shield economies from adverse global conditions and attract less volatile types of capital. However, when the policy space for using traditional macroeconomic policies is limited, countries may also turn to macroprudential and capital flow management policies in a pragmatic manner. The IMF can play an important role in helping countries to deal with capital flows, through its surveillance and lending policy and through international cooperation. JEL Classification: F3, F32, F38, F42, F65, G28 |
| Keywords: | capital flow management, capital flows, IMF, international cooperation |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2016180&r=opm |
| By: | Luigi Bocola; Alessandro Dovis |
| Abstract: | This paper uses the information contained in the joint dynamics of government’s debt maturity choices and interest rate spreads to quantify the importance of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk averse lenders and self-fulfilling rollover crises á la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by economic fundamentals and by expectations of future self-fulfilling defaults. These two sources of default risk have contrasting implications for the debt maturity choices of the government. Therefore, they can be indirectly inferred by tracking the evolution of the maturity structure of debt during a crisis. We fit the model to the Italian debt crisis of 2008-2012, finding that 12% of the spreads over this episode were due to rollover risk. Our results have implications for the effects of the liquidity provisions established by the European Central Bank during the summer of 2012. |
| JEL: | E44 F34 G12 G15 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22694&r=opm |
| By: | Pedro Bação (Faculdade de Economia da Universidade de Coimbra, Grupo de Estudos Monetários e Financeiros (GEMF)); António Portugal Duarte (Faculdade de Economia da Universidade de Coimbra, Grupo de Estudos Monetários e Financeiros (GEMF)); Diana Machado (Faculdade de Economia da Universidade de Coimbra, Grupo de Estudos Monetários e Financeiros (GEMF)) |
| Abstract: | The main goal of this paper is to assess the impact of exchange rate fluctuations on economic activity, namely on unemployment. We estimate a Vector Autoregressive (VAR) model for each of the following major economies: Australia, Brazil, China, Germany, Japan, Switzerland, the United Kingdom and the United States of America. The VAR model comprises the following variables: the unemployment rate, the GDP growth rate, the inflation rate, the interest rate, and the real effective exchange rate. We use the Cholesky decomposition to identify the shocks that drive these variables. The results obtained using the Cholesky decomposition depend on the ordering of the variables; therefore we discuss the results obtained when different orderings are employed. Our results suggest that an exchange rate appreciation leads to an increase in unemployment in relatively small countries such as Australia, Switzerland and the UK, but not in Japan or in the USA. The results for Brazil, China and Germany do not appear to be satisfactory, possibly because the sample covers a period of important structural change in those countries. |
| Keywords: | Competitiveness, currency wars, exchange rate, monetary policy, unemployment, VAR model. JEL Classification: F16, F31, F41. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2016-14.&r=opm |
| By: | Luca Fornaro |
| Abstract: | This paper provides a framework to understand debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging, world consumption demand is depressed and the world interest rate is low, reflecting a high propensity to save. If exchange rates are allowed to oat, deleveraging countries can rely on depreciations to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut o , because deleveraging countries cannot depreciate against the other countries in the monetary union, and therefore the fall in the demand for consumption and the downward pressure on the interest rate are amplified. As a result, deleveraging in a monetary union can generate a liquidity trap and an aggregate recession. |
| Keywords: | global debt deleveraging, Sudden Stops, liquidity trap, Monetary Union, precautionay savings, debt deflation |
| JEL: | E31 E44 E52 F32 F34 F41 G01 G15 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:931&r=opm |
| By: | Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Ozana Nadoveza (Faculty of Economics and Business, University of Zagreb); Lucija Rogić Dumančić (Faculty of Economics and Business, University of Zagreb); Josip Tica (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | The paper compares theoretical impulse response functions from a DSGE model for a small open economy with an empirical VAR model estimated for the Croatian economy. The theoretical model fits the data well as long as monetary policy is modelled as a fixed exchange rate regime. The paper considers only a foreign output gap shock. A positive foreign shock increases domestic GDP and prices and decreases terms of trade, which is in compliance with theoretical assumptions. Interest rates behave differently than suggested by the estimated DSGE model, which could be explained with an unconventional interest rate transmission channel in Croatia. |
| Keywords: | DSGE, foreign income shocks, exchange rate, Croatia, gross domestic product, Eurozone |
| JEL: | E32 F41 |
| Date: | 2016–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:1607&r=opm |
| By: | Clement ANNE |
| Abstract: | The recent commodity price drop has renewed attention on the importance to diversify resource-dependent economies in particular to limit their exposure to commodity price volatility. While commodity price booms can be an opportunity to diversify the economy if managed properly, it remains an empirical question whether this has effectively been the case. Using a panel of 78 resource-dependent countries over 1970-2012 we tackle this question thanks to cointegration analysis, dynamic macro-panel estimators, as well as analyses of diversification outcomes during selected commodity price boom and bust episodes. While our econometric results evidence a stable and significant impact of commodity price booms on export concentration through a more concentrated mix of already exported products, this relationship includes both an increase in export concentration during commodity price booms and an increase in export diversification during commodity price drops. We also evidence a higher increase in export concentration during the 2000s commodity price booms than the 1970s, which explains the urging current need of most resource-dependent countries to diversify. |
| JEL: | Q02 O14 O13 F14 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1825&r=opm |
| By: | Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Ozana Nadoveza (Faculty of Economics and Business, University of Zagreb); Lucija Rogić Dumančić (Faculty of Economics and Business, University of Zagreb); Josip Tica (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | The paper compares theoretical impulse response functions from a DSGE model for a small open economy with an empirical five variable VAR model estimated for the Croatian economy. In the paper we analyse the impact of productivity shock on the selected macroeconomic variables: domestic output gap, nominal interest rate, CPI inflation and terms of trade. The impulse responses from the empirical VAR model do not resemble those from the theoretical one for all the variables in any proposed monetary regimes. Results of modelling simultaneous interrelationships between variables also support the results that the productivity shocks do not play a significant role in determining the variation of selected macroeconomic variables in the case of the Croatian economy. |
| Keywords: | DSGE, productivity shocks, small open economy, exchange rate, Croatia |
| JEL: | D24 E32 F41 |
| Date: | 2016–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:1606&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: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1534&r=opm |
| By: | Gunes Kamber; Ozer Karagedikli; Michael Ryan; Tugrul Vehbi |
| Abstract: | This paper analyses the international spill-overs of uncertainty shocks originating in the US. We estimate an open economy, structural factor-augmented vector autoregression (FAVAR) model that identifies US uncertainty shocks and estimates the impact of these uncertainty shocks on the US economy, major world economies and a small open economy, namely New Zealand. The data-rich nature of our model allows us to investigate different transmission channels from the US to the rest of the world. We find the confidence channels, measured by the expectations surveys, are particularly important in the transmission of the uncertainty shock to a small open economy. |
| Keywords: | FAVAR, uncertainty shocks, small open economy |
| JEL: | C15 C32 E32 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-61&r=opm |
| By: | Marina Azzimonti |
| Abstract: | I examine the role of political instability as a potential explanation for the lack of capital flows from rich countries to poor countries (i.e. the `Lucas Paradox'). Using panel data from 1984 to 2014, I document the following: (i) developed countries exhibit larger inflows of foreign direct investment (FDI), (ii) countries subject to high investment risk are those that typically receive low FDI inflows, and (iii) investment risk is generally higher in fractionalized and politically unstable economies. These findings suggest a negative relationship between political instability and FDI through the investment risk channel. I then inspect the theoretical mechanism using a dynamic political-economy model of redistribution, wherein policymakers have access to an expropriation technology that can be used to extract resources from foreign investors. The proceeds are used to finance group-specific transfers to domestic workers, but hinder economic growth by discouraging FDI. Different social groups compete to gain control of this instrument, but face a probability of losing power at each point in time. The greater the degree of political turnover is, the stronger the incentives to expropriate when in power. A key force driving this result is redistributive uncertainty, since there is a possibility that no transfers will be received in the future. The mechanism is supported by the finding that investment risk (a measure that captures the degree to which the extraction technology is used) is negatively related to FDI and government stability. Finally, I show that the political equilibrium exhibits over-expropriation and under-investment even when there is no political uncertainty because fractionalized societies suffer from static inefficiencies due to the presence of a common pool problem. |
| JEL: | E6 F38 F43 H2 H21 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22705&r=opm |
| By: | Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis) |
| Abstract: | In advanced economies, a century-long near-stable ratio of credit to GDP gave way to rapid financialization and surging leverage in the last forty years. This “financial hockey stick” coincides with shifts in foundational macroeconomic relationships beyond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments, which we can document thanks to a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility, but also lower growth, more tail risk, as well as tighter real-real and real-financial correlations. International real and financial cycles also cohere more strongly. The new stylized facts that we discover should prove fertile ground for the development of a new generation of macroeconomic models with a prominent role for financial factors. |
| JEL: | E01 E13 E30 E32 E44 E51 F42 F44 G12 |
| Date: | 2016–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2016-23&r=opm |
| By: | Falconio, Andrea |
| Abstract: | This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that con- sists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry trade average excess return, Sharpe ratio and 5% quantile differ substantially across expansive and restrictive conventional mone- tary policy before the onset of the recent financial crisis. By contrast, the considered parameters are not affected by unconventional monetary policy during the financial crisis. JEL Classification: F31, G15, E52 |
| Keywords: | carry trade, monetary conditions, volatility |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161968&r=opm |
| By: | Ramesh Thakur |
| Abstract: | The stability of the global order is a function of the reconciliation between universal ethical principles and power asymmetries. Both principles and power are embedded in international institutions. As relative power shifts away from the West, the ability of the latter to exempt themselves from the reach of global norms—on human rights, international criminal justice, the rule of law, the use of force, the possession of nuclear weapons—will lessen. They will have to accommodate to the new normal either by bringing their conduct within the operation of international normative instruments, or else risk mass defections from global regimes. The relative loss of power means they have a material interest in strengthening, not weakening, a rules-based global order. |
| Keywords: | ethic, power, justice, double standards, Western and rising powers |
| Date: | 2016–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:appswp:201627&r=opm |