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on Open Economy Macroeconomics |
| By: | KANO, Takashi |
| Abstract: | The paper studies exchange rate implications of trend inflation within a two-country New Keynesian (NK) model under incomplete international financial markets. A NK Phillips curve generalized by trend inflation with a positive long-run mean implies an expectational difference equation of inflation with higher-order leads of expected inflation. The resulting two-country inflation differential is smoother, more persistent, and more insensitive to a real exchange rate. General equilibrium then yields (i) a persistent real exchange rate with an autoregressive root close to one, (ii) a hump-shaped impulse response of a real exchange rate with a half-life longer than four years, (iii) a volatile real exchange rate relative to cross-country inflation differential, (iv) an almost perfect co-movement between real and nominal exchange rates. and (v) a sharp rise in the volatility of a real exchange rate from a managed nominal exchange rate regime to a flexible one within an otherwise standard two-country NK model. Trend inflation, therefore, approaches empirical puzzles of exchange rates dynamics. |
| Keywords: | Real and Nominal Exchange Rates, Trend Inflation, New Keynesian Models |
| JEL: | E31 E52 F31 F41 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-38&r=opm |
| By: | Stephen McKnight (El Colegio de Mexico); Laura Povoledo (El Colegio de Mexico) |
| Abstract: | We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. In contrast to the one-good models of the existing literature, we show that sunspot shocks alone cannot replicate the data. Next, we consider a combination of sunspot shocks and technology shocks, and find that the indeterminacy model can now account for the counter-cyclical behavior observed for the terms of trade and real net exports, while simultaneously increasing their volatilities relative to output. The empirical success of the model is due to an unconventional transmission mechanism, whereby the terms of trade appreciates, rather than depreciates, in response to a positive technology shock. This unconventional feature, when combined with sunspot shocks, helps to reconcile the model with the data. However, the major failure of the model is its inability to resolve the Backus-Smith puzzle without a strongly negative cross-country correlation for productivity shocks. |
| Keywords: | indeterminacy, sunspots, international business cycles, net exports, terms of trade, Backus-Smith puzzle. |
| JEL: | E32 F41 F44 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:emx:ceedoc:2016-07&r=opm |
| By: | Jing Zhang (Federal Reserve Bank of Chicago) |
| Abstract: | We study both empirically and quantitatively the patterns of international capital flows by the private sector and the public sector. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1696&r=opm |
| By: | Gauti Eggertsson (Brown University); Neil Mehrotra (Brown University); Sanjay Singh (Brown University); Lawrence Summers (Harvard University) |
| Abstract: | We propose an open economy model of secular stagnation and show how it can be transmitted from one country to another via current account imbalances. While current account surpluses normally lower interest rates in the recipient country, in a secular stagnation, surpluses transmit recessions due to the zero lower bound on nominal interest rates. In general monetary policies and those directed at competitiveness have negative externalities on trading partners in these circumstances, while fiscal policies and those directed at stimulating domestic demand have positive externalities. This, in a positive sense, explains why the world has relied so much on monetary policies relative to fiscal policies in the wake of the financial crisis and in a normative sense points towards the desirability of fiscal policies. Fiscal policies in response to a secular stagnation are self-financing as in De Long and Summers (2012) in our numerical experiments and a one shot increase in debt will raise demand and is fiscally sustainable. While expansionary monetary policy only provides for a possibility of a better outcome without ex- cluding the possibility of continuing secular stagnation appropriate fiscal policy eliminates secular stagnation by directly raising the natural rate of interest as in Eggertsson-Mehrotra (2014). |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1701&r=opm |
| By: | Rarytska, Olena; Tsyrennikov, Viktor |
| Abstract: | Belief heterogeneity generates speculative cross-border capital flows that are much larger than flows generated by the hedging/insurance motives. We show theoretically that limiting financial trades may gen- erate welfare gains despite inhibiting insurance possibilities. Financial constraints tame speculation forces, limit movements of the net for- eign wealth positions, and thus reduce consumption volatility. This provides a novel justification for capital controls. Simulations indicate that welfare gains from imposing capital con- trols can be substantial, equivalent to a permanent consumption in- crease of up to 4%, or 80 times the cost of business cycles. Controls that activate only during substantial inflows or outflows are preferred to those constantly active, e.g. a transaction tax used by some emerg- ing market economies. Yet, despite improving macroeconomic stability capital controls may unintentionally lead to increased volatility in the domestic financial markets. |
| Keywords: | international portfolios, capital controls, foreign ex- change intervention, International Relations/Trade, F32, |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:cudawp:250031&r=opm |
| By: | Ansgar Belke; Clemens Domnick; Daniel Gros |
| Abstract: | This paper examines business cycle synchronization in the European Monetary Union with a special focus on the core-periphery pattern in the aftermath of the crisis. Using a quarterly index for business cycle synchronization by Cerqueira (2013), our panel data estimates suggest that it is countries belonging to the core that are faced with increased synchronization among themselves after 2007Q4, whereas peripheral countries decreased synchronization with regards to the core, non-EMU countries and among themselves. Correlation coefficients and nonparametric local polynomial regressions corroborate these findings. The usual focus on co-movements and correlations might be misleading, however, since we also find large differences in the amplitude of national cycles. A strong common cycle can thus lead to large differences in cyclical positions even if national cycles are strongly correlated. |
| Keywords: | business cycles, core-periphery, EMU, local polynomial regressions, synchronicity |
| JEL: | E32 F15 R23 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201608&r=opm |
| By: | Lorenzo Caliendo (Yale University); Fernando Parro (Federal Reserve Board); Aleh Tsyvinsky (Yale University) |
| Abstract: | We develop a general equilibrium model where producers purchase intermediate goods from the lowest cost supplier in the world. Factor prices, productivities and domestic frictions (misallocation) affect the mobility of goods across sectors within a country. In our model, changes in misallocation in a given country have welfare implications in foreign countries through two main mechanisms. First, a reduction in misallocation in a given country impacts production costs, and foreign countries benefit from the access to cheaper goods as a result. Second, lower domestic frictions allow countries to substitute foreign intermediate for domestic ones, which leads to a decline in production and wages in foreign countries. The relative importance of each of these two channels determines the international welfare effects of reducing domestic misallocation. In our model we also incorporate frictions of moving final goods as well as frictions of moving goods from a different sector and country. Using information from the world’s input output databases, we are able to separate changes in productivity from changes in misallocation. Using these estimates, we run a variety of counterfactuals to show the importance of reducing misallocation for the global economy. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1702&r=opm |
| By: | George Chouliarakis; Tadeusz Gwiazdowski; Sophia Lazaretou |
| Abstract: | Empirical analysis of a unique and unexplored historical dataset for Greece provides new insight into the state and regime dependence of the government spending multiplier. Greece fought numerous wars between the establishment of the modern Greek state and the outbreak of World War II. Using data for both armament and disarmament, and controlling for states and regimes in the economy, our empirical findings suggest that the exchange rate regime, the presence of exchange controls, and the business cycle all have a significant impact on the size of the government spending multiplier. However, analysing the interaction of these states and regimes turns out to be crucial to removing the bias from our multiplier estimates. In particular, regardless of other states and regimes in the economy, the multiplier is estimated to be zero during good times. In contrast, it is well above unity when spending decreases in a recession. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:230&r=opm |
| By: | William R. Cline (Peterson Institute for International Economics) |
| Abstract: | As of mid-November, the US dollar has become overvalued by about 11 percent. The prospect of fiscal stimulus and associated interest rate increases under the new US administration risks still further increases in the dollar. An even stronger dollar would widen the path of growing trade deficits already in the pipeline. As President-elect Donald Trump has attributed trade deficits largely to past trade agreement “disasters,” there is a corresponding risk of escalating trade policy conflict, in a perverse dynamic reminiscent of the initial years of Reaganomics. In October 2016, the base month of this new set of fundamental equilibrium exchange rate (FEER) estimates, the US dollar was overvalued by 8 percent, about the same amount as identified in the three previous issues in this series. The real effective exchange rate (REER) of the dollar in October was 17 percent above its level in mid-2014. Given the two-year lag from the exchange rate signal to the trade outcome, the US current account deficit is on track to widen from 2.7 percent of GDP this year to nearly 4 percent by 2021. The new estimates, all based on October exchange rates, again find a modest undervaluation of the yen (by 3 percent) but no misalignment of the euro and Chinese renminbi. The Korean won is undervalued by 6 percent. Cases of significant overvaluation besides that of the United States include Argentina (by about 7 percent), Turkey (by about 9 percent), Australia (by about 6 percent), and New Zealand (by about 4 percent). A familiar list of smaller economies with significantly undervalued currencies once again shows undervaluation in Singapore and Taiwan (by 26 to 27 percent), and Sweden and Switzerland (by 5 to 7 percent). |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb16-22&r=opm |