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on Open Economy Macroeconomics |
| By: | Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova |
| Abstract: | Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country’s vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two financial factors: income on international investments and changes in the valuations of those investments. We show how the characteristics of a country’s international investment portfolio – the size of its international asset and liability holdings, their currency denominations, their split between equity and debt, and their return characteristics – affect the dynamics of these financial factors. Then we decompose those dynamics into their drivers, explore how they are affected by domestic and global risk shocks, and apply this framework to 10 OECD economies. These examples, including a more detailed assessment for the UK, show that a substantial degree of international risk sharing can occur through current accounts and international portfolios. Our flexible framework clarifies which characteristics of a country’s international portfolio determine whether a current account deficit is “menacing” or “mitigating”. |
| JEL: | F21 F32 F36 F42 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22741&r=opm |
| By: | Joshua Aizenman; Menzie D. Chinn; Hiro Ito |
| Abstract: | We study how the financial conditions in the Center Economies [the U.S., Japan, and the Euro area] impact other countries over the period 1986 through 2015. Our methodology relies upon a two-step approach. We focus on five possible linkages between the center economies (CEs) and the non-Center economics, or peripheral economies (PHs), and investigate the strength of these linkages. For each of the five linkages, we first regress a financial variable of the PHs on financial variables of the CEs while controlling for global factors. Next, we examine the determinants of sensitivity to the CEs as a function of country-specific macroeconomic conditions and policies, including the exchange rate regime, currency weights, monetary, trade and financial linkages with the CEs, the levels of institutional development, and international reserves. Extending our previous work (Aizenman et al. (2016)), we devote special attention to the impact of currency weights in the implicit currency basket, balance sheet exposure, and currency composition of external debt. We find that for both policy interest rates and the real exchange rate (REER), the link with the CEs has been pervasive for developing and emerging market economies in the last two decades, although the movements of policy interest rates are found to be more sensitive to global financial shocks around the time of the emerging markets’ crises in the late 1990s and early 2000s, and since 2008. When we estimate the determinants of the extent of connectivity, we find evidence that the weights of major currencies, external debt, and currency compositions of debt are significant factors. More specifically, having a higher weight on the dollar (or the euro) makes the response of a financial variable such as the REER and exchange market pressure in the PHs more sensitive to a change in key variables in the U.S. (or the euro area) such as policy interest rates and the REER. While having more exposure to external debt would have similar impacts on the financial linkages between the CEs and the PHs, the currency composition of international debt securities does matter. Economies more reliant on dollar-denominated debt issuance tend to be more vulnerable to shocks emanating from the U.S. |
| JEL: | F15 F2 F31 F36 F41 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22737&r=opm |
| By: | Luisito Bertinelli (CREA, Université du Luxembourg); Olivier Cardi (LEO, Université de Tours, Université de Paris 2, CRED); Romain Restout (BETA, Université de Lorraine - IRES, Université catholique de Louvain) |
| Abstract: | This paper develops a tractable version of a two-sector open economy model with search frictions in order to account for the relative price and relative wage effect of technology shocks biased toward the traded sector. Using a panel of eighteen OECD countries, our estimates show that higher productivity in tradables relative to non trad- ables causes an appreciation in the relative price of non tradables along with a decline in non traded relative to traded wages while both responses display a considerable dis- persion across countries. The fall in the relative wage reveals the presence of mobility costs preventing wage equalization across sectors, while the cross-country dispersion in the relative wage responses suggest differences in labor market regulation. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that the relative wage significantly declines more and the relative price appreciates less in countries where labor market regulation is more pronounced. We show that these empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. When we calibrate the model to country-specific data, the model performs well in reproducing the cross-country pattern in the relative wage responses and to a lesser extent in the relative price changes. While the responses of the relative wage and the relative price display a wide dispersion across countries, both display a significant negative relationship with labor market regulation. |
| Keywords: | Productivity differential; Sectoral wages; Relative price of non tradables; Search theory; Labor market institutions; Labor mobility. |
| JEL: | E24 F16 F41 F43 J65 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:16-14&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 (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 shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. 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 is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing 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, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles. |
| Keywords: | Euro Crisis, Exchange Rate Misalignments, Eurobonds, Interest Rate |
| Date: | 2016–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01295438&r=opm |
| By: | Koichi Hamada (Research Institute for Economics & Business Administration (RIEB), Kobe University, Depertment of Economics, Yale University, USA); Masaya Sakuragawa (Faculty of Economics, Keio University) |
| Abstract: | A two-country version of the Blanchard model enables us to investigate the cross country effects of different rates of time preference in a well behaved manner. A patient country runs the current account surplus and becomes a creditor; a less patient country runs the current account deficit and becomes a debtor. Even a small difference in the rate of time preference produces a sustainable current account deficit/surplus. For example, the difference in the rate of time preference by 0.25 percent enables the impatient country to run the current account deficit of 4.8 percent of GNP. Our analysis and calibration results challenge the common sense view that global imbalances should be always balanced. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2016-33&r=opm |
| By: | Xiaodong Zhu (University of Toronto); Juanyi Xu (Hong Kong Univ of Science and Technology); Yong Wang (Hong Kong University of Science and Tech) |
| Abstract: | We study the dynamics of the real exchange rate between China and the US since 1990. We first show that a standard Balassa-Samuelson model without structural change cannot account for the observed real exchange rate behaviour. We then extend the Balassa-Samuelson framework to a three-sector model with structural change and frictions in both capital and labour markets. We show that the model can quantitatively account for both the structural changes in the two countries and the behaviour of the real exchange rate between the two countries. Finally, we find that factor market frictions are crucial for understanding the structural changes and real exchange rate dynamics. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1010&r=opm |
| By: | Òscar Jordà; Moritz Schularick; Alan M. Taylor |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22743&r=opm |
| By: | Syed Al-Helal Uddin |
| Abstract: | How is exchange rate pass-through (ERPT) measures affected by increasing participation in global value chains? This paper measures ERPT for value-added trade, where intermediate inputs are shared among sectors and countries in a back-and-forth manner for producing a single final product. Estimation of pass-through was done using World Input-Output Database (WIOD), World Economic Outlook (WEO), and OECD statistics. Empirically estimated findings suggest that ignoring the value-added trade will cause a systematic upward bias in the estimation of ERPT. From empirical investigation, it is also evident that there exists substantial heterogeneity in pass-through rates across sectors: sectors with high-integration into global market functions with a lower rate of exchange in comparison to sectors with less integration. |
| JEL: | F14 F23 F41 L16 |
| Date: | 2016–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2016:pud11&r=opm |
| By: | Edouard Challe (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique); Jose Ignacio Lopez (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS - Centre National de la Recherche Scientifique); Eric Mengus (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The run up to the euro currency initiated a period of capital inflows into southern European countries, i.e., Spain, Portugal, Italy and Greece. We document that those countries, and only them among OECD countries, concomitantly experienced a decline in the quality of their institutions. We confirm the joint pattern of capital in- flows and institutional decline in a large panel of countries. We show theoretically that this joint pattern naturally follows from a “soft budget constraint” syndrome wherein persistently cheap external funding undermines incentives to maintain good institutions –understood here as the degree of government commitment not to support inefficient firms. Low institutional quality ultimately raises the share of inefficient firms, which lowers average productivity and raises productivity dispersion across firms –the typical pattern of productivity in southern Europe over the period under consideration. |
| Keywords: | TFP, institutions, current account |
| Date: | 2016–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01331723&r=opm |