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on Open Economy Macroeconomics |
| By: | Òscar Jordà; Moritz Schularick; Alan M. Taylor |
| Abstract: | Fixing the exchange rate constrains monetary policy. Along with unfettered cross-border capital flows, the trilemma implies that arbitrage, not the central bank, determines how interest rates fluctuate. The annals of international finance thus provide quasi-natural experiments with which to measure how macroeconomic outcomes respond to policy rates. Based on historical data since 1870, we estimate the local average treatment effect (LATE) of monetary policy interventions and examine its implications for the population ATE with a trilemma instrument. Using a novel control function approach we evaluate the robustness of our findings to possible spillovers via alternative channels. Our results prove to be robust. We find that the effects of monetary policy are much larger than previously estimated, and that these effects are state-dependent. |
| JEL: | E01 E30 E32 E44 E47 E51 F33 F42 F44 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23074&r=opm |
| By: | Benedict, Craig (SUNY Oswego); Crucini, Mario J. (Vanderbilt University and NBER); Landry, Anthony E. (Bank of Canada) |
| Abstract: | In this paper, we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices. We develop a menu cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our analysis is that the labor-cost share of retail production differs across goods and services in the consumption basket. For example, the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut due to the high volatility in wholesale gasoline prices relative to the wages of unskilled labor, even when both retailers face a common menu cost. This modeling approach allows us to account for some of the cross-sectional differences observed in the frequency of price adjustments across goods. We apply this model to Ecuador to take advantage of inflation variations and the rich panel of monthly retail prices. |
| JEL: | E3 E5 F3 F33 |
| Date: | 2016–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:278&r=opm |
| By: | Chen, Kan (BBVA Research); Crucini, Mario J. (Vanderbilt University and NBER) |
| Abstract: | Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach. |
| JEL: | C55 C68 F41 F44 |
| Date: | 2016–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:279&r=opm |
| By: | Mariarosaria Comunale (Bank of Lithuania); Davor Kunovac (Bank of Finland) |
| Abstract: | In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area. |
| Keywords: | Exchange rate pass-through, import prices, consumer prices, in?ation, bayesian vector autoregression. |
| JEL: | C38 E31 F31 |
| Date: | 2017–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:38&r=opm |
| By: | Yilmazkuday, Hakan (Florida International University) |
| Abstract: | International trade studies have higher macro (Armington) elasticity measures compared to international finance studies. This observation has evoked not only mixed policy implications regarding tariffs and exchange rates but also mixed welfare gains from trade. Regarding the policy implications, this so-called international elasticity puzzle is solved in this paper by distinguishing between elasticities of substitution and price elasticities of demand that are connected to each other through expenditure shares. It is shown theoretically and confirmed empirically that the macro elasticity in international trade is a weighted average of the macro elasticity in international finance and the elasticity of substitution across products of foreign countries. It is implied that one can always find an elasticity of substitution across foreign countries that would be consistent with different macro elasticities in the two literatures; therefore, the puzzle is something artificial due to the way that the foreign products are aggregated at destination countries. Regarding the welfare gains from trade, the two literatures are shown to have the very same implications when international finance studies have a unitary macro elasticity of substitution between home and foreign products or unitary terms of trade. As opposed to the existing literature that has offered many supplyside solutions to the puzzle, the results in this paper are independent of the supply side and thus are consistent with any production structure. |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:299&r=opm |
| By: | Michalis Rousakis; Romanos Priftis |
| Abstract: | Abstract This paper presents an analytical narration of the later stages of the Greek crisis, focusing on two key events that unfolded during 2014-2015 and set Greece apart from other episodes of sovereign debt crises: the risk of Grexit and the imposition of capital controls on the banking sector. To account for them both, we extend the standard small open economy environment along three dimensions. First, we allow for an informal sector. Second, we allow for a richer menu of assets that include cash, which is needed for informal consumption and is costly to hold. Third, we introduce a banking sector that turns households' deposits into capital. We show that a risk of Grexit leads households to run down their deposits to the detriment of bank balance sheets, increase their demand for cash, and increase their consumption whilst reallocating it towards formal goods. As evidenced by the data capital controls mitigate the deposit ight and reinforce the switch of consumption to formality. |
| Keywords: | Capital controls, small open economy, exit from a currency union, cash, informal economy, financial intermediaries, Greece |
| JEL: | E2 E4 F41 G11 G28 |
| Date: | 2017–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:822&r=opm |
| By: | Asli Demirguc-Kunt; Balint Horvath; Harry Huizinga |
| Abstract: | This paper uses loan-level data from 124 countries over 1995–2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks. |
| Keywords: | Cross-border lending, monetary transmission, banking FDI, bank regulation, capital controls. |
| JEL: | E44 E52 F34 F38 F42 G15 G20 |
| Date: | 2017–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:bri:accfin:17/6&r=opm |
| By: | Auer, Raphael (Bank of International Settlements); Borio, Claudio (Bank of International Settlements); Filardo, Andrew J. (Bank of International Settlements) |
| Abstract: | Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional tradebased measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation. |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:300&r=opm |
| By: | Janus, Thorsten (University of Wyoming); Riera-Crichton, Daniel (Bates College) |
| Abstract: | In this paper, we study the relationship between banking crises, external financial crises and gross international capital flows. First, we confirm that banking and external crises are correlated. Then, as we explore the role of gross capital flows, we find that declines of external liabilities in the balance of payments – a proxy for foreign capital repatriation we call gross foreign investment reversals (GIR) – predict banking as well as external crises. Finally, we estimate the effects of GIR-associated banking crises on the risk of currency and sudden stop crises in an instrumental-variables specification. In developing countries, GIR-associated banking crises increase the onset risk for currency and sudden stop crises by 39-50 and 28-30 percentage points per year respectively. For OECD countries, we show an increase in the currency crisis risk by 33-45 percentage points. |
| JEL: | F32 G01 G15 G21 |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:273&r=opm |
| By: | Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International(CERDI)); Tidiane KINDA (Centre d'Etudes et de Recherches sur le Développement International(CERDI)); Rasmané OUEDRAOGO; Patrick PLANE (Centre d'Etudes et de Recherches sur le Développement International(CERDI)) |
| Abstract: | This paper assesses the impact of capital inflows and their 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 percent, resulting in a gain of roughly 2 additional percentage points on top of the 3.7 percent annual growth rate observed within the sample over the period 1980-2012. |
| Keywords: | Capital inflows, Real exchange rate dynamics, Economic growth. |
| JEL: | O4 F4 F3 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1857&r=opm |
| By: | Alexius, Annika (Dept. of Economics, Stockholm University); Holmberg, Mikaela (Dept. of Economics, Stockholm University) |
| Abstract: | As central banks struggle to boost inflation rates in the face of low global inflation and volatile foreign exchange markets, it has become particularly important to understand how inflation in open economies is affected by movements in exchange rates and foreign inflation. Using a time-varying parameter Bayesian VAR, we analyze the behavior of pass-through across time and in relation to macroeconomic variables. We find little support for the Taylor (2000) hypothesis that pass-through is lower when inflation is close to target. In our data, inflation rates are often below rather than above target, and pass-through does not appear to increase significantly at low inflation rates. Furthermore, inflation persistence is unrelated to pass-through. The pass-through of foreign prices is much higher than the pass through of exchange rates. It is positively associated with the variance of foreign inflation, which is consistent with Calvo pricing. |
| Keywords: | Pass through; inflation; Bayesian time varying parameter VAR |
| JEL: | E31 F41 |
| Date: | 2017–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2017_0001&r=opm |
| By: | Bonadio, Barthélémy (University of Michigan); Fischer, Andreas M. (Swiss National Bank and CEPR); Saure, Philip (Swiss National Bank) |
| Abstract: | On January 15, 2015, the Swiss National Bank terminated its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the exchange rate pass-through into import unit values of this shock at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euro the pass-through is immediate and complete. This finding is consistent with no systematic nominal price adjustment in this subset of goods. Second, for goods invoiced in Swiss francs the pass-through is partial and very fast: it starts on the second working day after the exchange rate shock and reaches the medium-run pass-through after eight working days on average. We interpret the latter finding as evidence that nominal rigidities unravelled quickly in the face of a large exchange rate shock. |
| JEL: | F14 F31 F41 |
| Date: | 2016–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:282&r=opm |
| By: | Grant, Everett (Federal Reserve Bank of Dallas) |
| Abstract: | I identify new patterns in countries' economic performance over the 2007-2014 period based on proximity through distance, trade, and finance to the US subprime mortgage and Eurozone debt crisis areas. To understand the causes of the cross-country variation, I develop an open economy model with two transmission channels that can be shocked separately: international trade and finance. The model is the first to include a government and heterogeneous firms that can default independently of one another and has a novel endogenous cost of sovereign default. I calibrate the model to the average experiences of countries near to and far from the crisis areas. Using these calibrations, disturbances on the order of those observed during the late 2000s are separately applied to each channel to study transmission. The results suggest credit disruption as the primary contagion driver, rather than the trade channel. Given the substantial degree of financial contagion, I run a series of counterfactuals studying the efficacy of capital controls and find that they would be a useful tool for preventing similarly severe contagion in the future, so long as there is not capital immobility to the degree that the local sovereign can default without suffering capital flight. |
| JEL: | E32 F40 F41 F44 H63 |
| Date: | 2016–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:280&r=opm |
| By: | Priftis, Romanos; Zimic, Srecko |
| Abstract: | We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data. |
| Keywords: | Debt financing, Fiscal multipliers, Government spending, Magnitude restrictions, Small open economy |
| JEL: | E2 F41 G15 H6 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2017/01&r=opm |