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on Open Economy Macroeconomics |
| By: | Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:503441&r=opm |
| By: | Cheung, Yin-Wong; Chinn, Menzie D.; Garcia Pascual, Antonio; Zhang, Yi |
| Abstract: | Previous assessments of nominal exchange rate determination, following Meese and Rogoff (1983) have focused upon a narrow set of models. Cheung et al. (2005) augmented the usual suspects with productivity based models, and "behavioral equilibrium exchange rate" models, and assessed performance at horizons of up to 5 years. In this paper, we further expand the set of models to include Taylor rule fundamentals, yield curve factors, and incorporate shadow rates and risk and liquidity factors. The performance of these models is compared against the random walk benchmark. The models are estimated in error correction and first-difference specifications. We examine model performance at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change), as well as the “consistency” test of Cheung and Chinn (1998). No model consistently outperforms a random walk, by a mean squared error measure, although purchasing power parity does fairly well. Moreover, along a direction-of-change dimension, certain structural models do outperform a random walk with statistical significance. While one finds that these forecasts are cointegrated with the actual values of exchange rates, in most cases, the elasticity of the forecasts with respect to the actual values is different from unity. Overall, model/specification/currency combinations that work well in one period will not necessarily work well in another period. JEL Classification: F31, F47 |
| Keywords: | behavioral equilibrium exchange rate model, exchange rates, forecasting performance, interest rate parity, monetary model |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172018&r=opm |
| By: | Wenxin Du; Alexander Tepper; Adrien Verdelhan |
| Abstract: | We find that deviations from the covered interest rate parity condition (CIP) imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on the banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed-income spreads and with nominal interest rates. |
| JEL: | F31 G15 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23170&r=opm |
| By: | Enrique Alberola; Gianluca Benigno |
| Abstract: | We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates demand and has long-run implications on the sectoral allocation of labor. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances. |
| Keywords: | Commodity Resource Curse, Dutch-Disease, Financial Openness, Endogenous Growth |
| JEL: | F32 F36 F41 F43 O13 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-14&r=opm |
| By: | Martin Eichenbaum; Benjamin K. Johannsen; Sergio Rebelo |
| Abstract: | This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates. |
| JEL: | E52 F31 F41 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23158&r=opm |
| By: | Raphael A. Auer; Andrei A. Levchenko; Philip Sauré |
| Abstract: | We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation. |
| Keywords: | international inflation synchronization, globalisation, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain |
| JEL: | E31 E52 E58 F02 F14 F33 F41 F42 F62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-03&r=opm |
| By: | João Sousa Andrade (CeBER and Faculty of Economics of the University of Coimbra); António Portugal Duarte (CeBER and Faculty of Economics of the University of Coimbra) |
| Abstract: | Bulgaria, Croatia, Estonia, Latvia, Lithuania, Hungary, Poland, Czech Republic, Romania, Slovenia, and Slovakia have all benefited from an increase of European Union capital transfers of funds since the demand for European integration. At the same time, foreign direct investments have risen, mainly due to the liberalisation of capital movements. The effects of those funds and the reduction of financial costs can be considered as analogous to the phenomenon known as Dutch Disease. That is to say, the inflow of financial transfers is also considered a curse. In order to eliminate this curse we must take into account the two effects associated with Dutch Disease: the ‘spending effect’ and the ‘resource movement effect’. Public policies have not been appropriate and have not prevented the real exchange rate appreciation, thereby contributing to a poor performance in terms of competitiveness and economic growth. After a descriptive analysis of some variables, we estimate a set of equations that take account of the direct and indirect effects of European Union funds and financial costs on the economy where the effects on the real exchange rate play the major role. |
| Keywords: | GMM, foreign transfers, financial costs, Dutch Disease, Dynamic Models, and public policies. |
| JEL: | C01 E23 F43 H63 J31 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:papers:2017-03&r=opm |
| By: | G. Kemal Ozhan (University of St Andrews) |
| Abstract: | This paper studies the role of the financial sector in affecting domestic resource allocation and cross-border capital flows. I develop a quantitative, two-country, macroeconomic model in which banks face endogenous and occasionally binding leverage constraints. Banks lend funds to be invested in tradable or non-tradable sector capital and there is international financial integration in the market for bank liabilities. I focus on news about economic fundamentals as the key source of fluctuations. Specifically, in the case of positive news on the valuation of non-traded sector capital that turn out to be incorrect at a later date, the model generates an asymmetric, belief-driven boom-bust cycle that reproduces key features of the recent Eurozone crisis. Bank balance sheets amplify and propagate fluctuations through three channels when leverage constraints bind: First, amplified wealth effects induce jumps in import-demand (demand channel). Second, changes in the value of non-tradable sector assets alter bank lending to tradable sector firms (intra-national spillover channel). Third, domestic and foreign households re-adjust their savings in domestic banks, and capital flows further amplify fluctuations (international spillover channel). A common central bank’s unconventional policies of private asset purchases and liquidity facilities in response to unfulfilled expectations are successful at ameliorating the economic downturn. |
| Keywords: | Bank Lending, Belief-Driven Dynamics, Current Account, Macroeconomic Interdependence |
| JEL: | E44 F32 F41 G15 G21 |
| Date: | 2017–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1704&r=opm |
| By: | Raphael Raduzzi; Antonio Ribba |
| Abstract: | In this work we provide an analysis over the period 1999 - 2015 of the effects of oil shocks on prices and GDP in a group of small Euro-area economies. The group includes Austria, Belgium, Finland, Greece, Ireland, Italy, Netherlands, Portugal and Spain. We use the structural near-VAR methodology and are thus able to model the joint interaction of area-wide macroeconomic variables and national variables. We find that under the EMU oil price shocks have been important drivers of business cycle fluctuations in almost all these countries. Moreover, an increase in oil prices produces significant recessionary effects in all the countries included in the investigation. Thus, although there are different sizes in the responses of output in the investigated countries, our main conclusion is that oil prices (still) matter for European economies |
| Keywords: | Oil Shocks; Business Cycles; Near-Structural VARs; Euro area |
| JEL: | E31 E32 Q43 C32 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:127&r=opm |
| By: | Christopher L. House; Christian Proebsting; Linda L. Tesar |
| Abstract: | We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue. |
| JEL: | E00 E62 F41 F44 F45 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23147&r=opm |
| By: | Mayer, Eric; Maas, Daniel; Rüth, Sebastian |
| Abstract: | We investigate the negative correlation between housing markets and the current account in Spain. By employing robust sign restrictions, which we derive from a DSGE model for a currency union, we analyze the effects of Spanish pull and Eurozone push factors in a mixed frequency VAR framework. Savings glut, risk premium, and housing bubble shocks are capable of generating the negative co-movement of housing markets and the current account in the data. In contrast, and counterfactual to the housing boom, financial easing shocks in Spain predict a decline in, both, residential investment and house prices. Among the four identifed shocks, savings glut shocks have most explanatory power for real house prices, whereas risk premium shocks account for most of the variation in residential investment. Financial easing shocks explain fluctuations to a similar extend as savings glut and risk premium shocks, while housing bubble shocks explain slightly less variance in the data. |
| JEL: | E32 F32 F45 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145824&r=opm |
| By: | Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Ozcan; Mehmet Fatih Ulu |
| Abstract: | We show that capital inflows are important drivers of domestic credit cycles using a firm-bank-loan level dataset for a representative emerging market. Instrumenting inflows by changes in global risk appetite (VIX), we find that a fall in VIX leads to a large decline in real borrowing rates and an expansion in credit supply. Estimates explain 40% of observed cyclical corporate credit growth. The OLS-elasticity of interest rates vis-á-vis capital inflows is smaller than the IV-elasticity. Banks with higher noncore funding offer relatively lower rates to low net worth firms, but do not extend more credit to them given collateral constraints |
| JEL: | E0 F2 F3 F4 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23149&r=opm |
| By: | G. Kemal Ozhan (University of St Andrews) |
| Abstract: | This paper studies the role of the financial sector in affecting domestic resource allocation and cross-border capital flows. I develop a quantitative, two-country, macroeconomic model in which banks face endogenous and occasionally binding leverage constraints. Banks lend funds to be invested in tradable or non-tradable sector capital and there is international financial integration in the market for bank liabilities. I focus on news about economic fundamentals as the key source of fluctuations. Specifically, in the case of positive news on the valuation of non-traded sector capital that turn out to be incorrect at a later date, the model generates an asymmetric, belief-driven boom-bust cycle that reproduces key features of the recent Eurozone crisis. Bank balance sheets amplify and propagate fluctuations through three channels when leverage constraints bind: First, amplified wealth effects induce jumps in import-demand (demand channel). Second, changes in the value of non-tradable sector assets alter bank lending to tradable sector firms (intra-national spillover channel). Third, domestic and foreign households re-adjust their savings in domestic banks, and capital flows further amplify fluctuations (international spillover channel). A common central bank’s unconventional policies of private asset purchases and liquidity facilities in response to unfulfilled expectations are successful at ameliorating the economic downturn. |
| Keywords: | Bank Lending, Belief-Driven Dynamics, Current Account, Macroeconomic Interdependence |
| JEL: | E44 F32 F41 G15 G21 |
| Date: | 2017–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1701&r=opm |
| By: | Paul Corrigan |
| Abstract: | Terms-of-trade shocks are known to be key drivers of business cycles in open economies. This paper argues that terms-of-trade shocks were also important for house price fluctuations in a panel of developed countries over the 1994–2015 period. In a panel vector error-correction model of house prices, household debt and real tradable prices, terms-of-trade shocks explain between 16 and 41 per cent of the long-run variance in house price growth in a typical country, and from 45 to 85 per cent of the long-run variance of the ratio of house prices to non-housing consumption. Most of the variation in the house price/consumption ratio is associated with changes in real import prices, with idiosyncratic shocks to real export prices playing a minor role. On average, a permanent 1 per cent decline in real import prices raises the ratio of real house prices to non-housing consumption by about 0.9 per cent. |
| Keywords: | Financial stability, Housing, International topics |
| JEL: | C32 E32 E51 F36 F41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-1&r=opm |
| By: | David Berger; Joseph Vavra |
| Abstract: | The dispersion of many economic variables is countercyclical. What drives this fact? Greater dispersion could arise from greater volatility of shocks or from agents responding more to shocks of constant size. Without data separately measuring exogenous shocks and endogenous responses, a theoretical debate between these explanations has emerged. In this paper, we provide novel identification using the open-economy environment: using confidential BLS microdata, we document a robust positive relationship between exchange rate pass-through and the dispersion of item-level price changes. We show this relationship arises naturally in models with time-varying responsiveness but is at odds with models featuring volatility shocks. |
| JEL: | E10 E3 E31 E52 F3 F31 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23143&r=opm |