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on Open Economy Macroeconomics |
| By: | Michael B. Devereux (University of British Columbia); Eric R. Young (University of Virginia); Changhua Yu (Peking University) |
| Abstract: | The dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies. This paper studies the benefits of capital controls and monetary policy in an open economy with financial frictions, nominal rigidities, and sudden stops. We focus on a time-consistent policy equilibrium. We find that during a crisis, an optimal monetary policy should sharply diverge from price stability. Without commitment, policymakers will also tax capital inflows in a crisis. But this is not optimal from an ex-ante social welfare perspective. An outcome without capital inflow taxes, using optimal monetary policy alone to respond to crises, is superior in welfare terms, but not time-consistent. If policy commitment were in place, capital inflows would be subsidized during crises. We also show that an optimal policy will never involve macro-prudential capital inflow taxes, or a departure from price stability, as a precaution against the risk of future crises (whether or not commitment is available). |
| Keywords: | Sudden stops, Pecuniary externality, Monetary policy, Capital controls, Time-consistency |
| JEL: | E44 E58 F38 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:032016&r=opm |
| By: | Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | Detailed country-by-country chronologies are an informative companion piece to our paper “Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?,” which provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. The individual country chronologies are also a central component of our approach to classifying regimes. These country histories date dual or multiple exchange rate episodes, as well as to differentiate between pre-announced pegs, crawling pegs, and bands from their de facto counterparts. We think it is important to distinguish between say, de facto pegs or bands from announced pegs or bands, because their properties are potentially different. The chronologies also flag the dates for important turning points, such as when the exchange rate first floated, or when the anchor currency was changed. We extend our chronologies as far back as possible, even though we only classify regimes from 1946 onwards. |
| JEL: | E5 F3 F4 N2 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23135&r=opm |
| By: | Vogel, Lukas; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner |
| Abstract: | The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The dynamics of financial shocks identified by the model is consistent with observed performance indicators of the EA and US banking systems. |
| JEL: | E32 F41 C11 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145473&r=opm |
| By: | Kenshiro Ninomiya (Faculty of Economics, Shiga University) |
| Abstract: | The subprime loan mortgage crisis has revived scholarly interest in Minsky fs financial instability hypothesis. The related mathematical models present two types of Minskian financial structures, which we identify as the lenders f risk type (LR) and the hedge, speculative and Ponzi type (HSP) We construct macrodynamic models in a fixed and floating exchange rate sys- tem which considers both the LR and HSP financial structures. We examine the effects of international capital mobility and international lenders f risks and demonstrate the significance of the LR and HSP financial structures in the fixed and floating exchange rate system. We emphasize the significance of stable financial structures in order to stabilize dynamic systems in an open economy. |
| Keywords: | Minskian financial structure, financial fragility, financial instability,international capital mobility |
| JEL: | E12 E32 E43 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:shg:dpapeb:16&r=opm |
| By: | Osman Furkan Abbasoglu (Istanbul School of Central Banking, Central Bank of the Republic of Turkey); Ayse Imrohoroglu (Marshall School of Business, University of Southern California); Ayse Kabukcuoglu (College of Administrative Sciences and Economics, Koc University) |
| Abstract: | During the 2011-2015 period, Turkey's current account deficit as a percentage of GDP was one of the largest among the OECD countries. In this paper, we examine if this deficit can be considered sustainable using the Engel and Rogers (2006) approach. In this framework, the current account of a country is determined by the expected discounted present value of its future share of world GDP relative to its current share. A country, whose income is anticipated to rise relative to the rest of the world is expected to borrow now and run a current account de cit. Our findings suggest that Turkey's current account deficit in 2015 may be considered sustainable if the Turkish economy's share in the world economy could continue to grow at rates similar to the past. The same approach, however, indicates that the current account deficit in 2011, at its peak, was unlikely to be sustainable. |
| Keywords: | Current account; open economy macroeconomics; growth |
| JEL: | F32 F41 F43 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1705&r=opm |
| By: | J. Scott Davis; Ignacio Presno |
| Abstract: | Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to "manage" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables. |
| Keywords: | Capital controls ; Credit constraints ; Small open economy |
| JEL: | F32 F41 E52 E32 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1190&r=opm |
| By: | Geert Bekaert; Arnaud Mehl |
| Abstract: | We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance. |
| JEL: | F15 F21 F30 F36 F38 F41 F6 G15 N2 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23124&r=opm |
| By: | Soyoung Kim (Seoul National University); Kuntae Lim (Bank of Korea) |
| Abstract: | This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the ¡°exchange rate puzzle,¡± ¡°delayed overshooting puzzle,¡± and ¡°forward discount bias puzzle¡± are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries. |
| Keywords: | VAR, Monetary Policy Shocks, Exchange Rate, UIP Condition, Delayed Overshooting |
| JEL: | F3 E5 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:192016&r=opm |
| By: | Mariam Camarero (INTECO & Department of Economics, Universitat Jaume I, Castellón, Spain); Jesús Peiró-Palomino (INTECO & Department of Economics, Universitat Jaume I, Castellón, Spain); Cecilio Tamarit (INTECO & Department of Applied Economics II, University of Valencia, Castellón, Spain) |
| Abstract: | The purpose of the paper is to investigate the role that unbalanced net foreign asset positions play in the growth path of the economies. In particular, the hypothesis to be tested is whether external imbalances may constrain growth in debtor countries. We analyze a large sample of countries using Lane and Milesi- Ferretti “External Wealth of Nations Dataset” and employing both parametric and nonparametric techniques. We find a preponderant positive relationship between the external position and growth, although the impact differs between countries and temporal periods. |
| Keywords: | Economic growth; net external position; nonparametric regression |
| JEL: | C14 F34 O47 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2017/02&r=opm |
| By: | Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth |
| Abstract: | This paper provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often-cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Our central finding is that the US dollar scores (by a wide margin) as the world's dominant anchor currency and, by some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled in recent years. While the incidence of capital account restrictions has been trending lower for decades, an important wave toward capital market integration dates as recently as the mid-1990s. We suggest that record accumulation of reserves post 2002 has much to do with many countries' desire to stabilize exchange rates in an environment of markedly greater capital mobility. Indeed, the continuing desire to manage exchange rates despite increased capital mobility post-2003 may be a key factor underpinning the modern-day Triffin dilemma that some have recently pointed to. |
| JEL: | E5 F3 F4 N2 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11826&r=opm |
| By: | Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | This paper provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often-cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Our central finding is that the US dollar scores (by a wide margin) as the world’s dominant anchor currency and, by some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled in recent years. While the incidence of capital account restrictions has been trending lower for decades, an important wave toward capital market integration dates as recently as the mid-1990s. We suggest that record accumulation of reserves post 2002 has much to do with many countries’ desire to stabilize exchange rates in an environment of markedly greater capital mobility. Indeed, the continuing desire to manage exchange rates despite increased capital mobility post-2003 may be a key factor underpinning the modern-day Triffin dilemma that some have recently pointed to. |
| JEL: | E50 F3 F4 N2 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23134&r=opm |
| By: | Kelvin Ho (Hong Kong Monetary Authority); Eric Wong (Hong Kong Monetary Authority); Edward Tan (Hong Kong Monetary Authority) |
| Abstract: | In view of the debate on exchange rate stabilization in Asia, this paper introduces a new and original approach to the determination of equilibrium real exchange rates (ERER) across ASEAN+3. Existing literature usually computes a country¡¯s ERER as the real exchange rate that brings the balance of payments of that country in to equilibrium with respect to the rest of the world, following a partial equilibrium approach. For a set of countries belonging to a highly integrated area, separately computing ERERs for each country may lead to mutual inconsistencies. The methodology in this paper achieves a simultaneous determination of the ERERs of all countries in the region, so that the trade balance of each of them is consistently in equilibrium with respect to the rest of the region. Numerical simulations conducted for ASEAN+3 show that such a methodology produces consistent results and may therefore be a useful way of evaluating exchange rate deviations from equilibrium within the area. The method is applied to assess ERER deviations of single currencies of ASEAN+3 vis-¨¤-vis the Chinese yuan and the Japanese yen. The results provide a helpful insight into the relative suitability of these two currencies to play a benchmark role in an exchange rate system for the whole region. |
| Keywords: | F31, F33, F42, F45 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:132016&r=opm |
| By: | Yin-Wong Cheung (City University of Hong Kong); Kenneth K. Chow (Hong Kong Monetary Authority); Matthew S. Yiu (Hong Kong Institute for Monetary Research) |
| Abstract: | The revival of strong capital flows to emerging economies in the aftermath of the Global Financial Crisis in 2008-09 has rekindled the debate on the adverse effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross-border fund movements. To illustrate the effects of different types of capital flows, we study official and illicit flows on Hong Kong¡¯s equity and residential housing markets. It is found that the official and illicit capital flow measures reflect different facets of flow movements and exhibit differential effects on the equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of policies targeting specific sectors. |
| Keywords: | Capital flows, currency-based measure, illicit flow measure, equity market, real estate market |
| JEL: | F32 E42 G15 R30 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:012017&r=opm |
| By: | D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Mendoza, Enrique G. (University of Pensylvania) |
| Abstract: | Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history” in macroeconomics. We propose a heterogeneous- agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to value of debt for self-insurance, liquidity, and risk-sharing. The government’s aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical comovements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt, and yet spreads are zero most of the time. |
| Keywords: | public debt; sovereign default; debt crisis; European crisis |
| JEL: | E44 E6 F34 H63 |
| Date: | 2017–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-4&r=opm |
| By: | Alain Kabundi; Asi Mbelu |
| Abstract: | This paper uses the two-stage exchange rate pass-through (ERPT) framework instead of the direct pass-through (PT) from the exchange rate to consumer inflation to assess the variation in the ERPT for South Africa from 1994 to 2014. The paper uses rolling-window estimation to examine the possibility of change in the ERPT over time. In addition, it investigates the asymmetric behaviour of the ERPT over the business cycle. The results indicate that the ERPT for South Africa is complete in the …rst stage but incomplete in the second stage. It implies that retailers do not pass all the cost to consumers. The …first-stage ERPT has declined slightly since the Global Financial Crisis. Weak domestic demand and possibly the concentration of …rms in the manufacturing sector are the main forces behind this low PT. Moreover, there is evidence of asymmetry in the …first-stage ERPT in that it tends to rise in the upturn phase of the economy compared to the downturn. The second-stage ERPT shows a considerable decline since the adoption of the in‡ation-targeting regime. Similar to the fi…rst-stage case, the PT is muted in the downturn but rises in the expansionary phase by about 10 per cent. |
| Keywords: | Exchange rate pass-through, rolling-window regression, symmetric exchange rate pass-through |
| JEL: | C51 E52 E58 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:649&r=opm |