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on Open Economy Macroeconomics |
| By: | Graciela Laura Kaminsky (George Washington University); Pablo Vega-Garcia (George Washington University) |
| Abstract: | The theoretical literature on sovereign defaults has focused on adverse shocks to debtors’ economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center such as the European Sovereign Debt Crisis in the aftermath of the U.S. Subprime Crisis in 2008. Crises in the financial centers are rare disasters and thus, their effects on the periphery can only be captured by examining long episodes. This paper examines sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger investors’ losses. |
| Keywords: | Sovereign debt crises, debt restructuring, defaults, default spells, debt reduction rates, debt sustainability, liquidity crises, systemic and idiosyncratic crises |
| JEL: | F30 F34 F65 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gwi:wpaper:2016-27&r=opm |
| By: | Anton Korinek |
| Abstract: | In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are Pareto efficient, as long as the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated. |
| Keywords: | Open economies;Current account;Intervention;Monetary policy;Fiscal policy;Macroprudential Policy;Capital controls;Exchange rate management;Spillovers;Economic theory;General equilibrium models;first welfare theorem, international policy cooperation, spillovers, currency wars |
| Date: | 2017–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/25&r=opm |
| By: | Kollmann, Robert |
| Abstract: | The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded-good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks.Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively. |
| Keywords: | international business cycle synchronization, recursive preferences, terms of trade, real exchange rate, wealth effect on labor supply |
| JEL: | E32 F31 F32 F36 F41 F43 F44 F47 |
| Date: | 2017–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77558&r=opm |
| By: | Gustavo Adler; Nicolas E Magud; Alejandro M. Werner |
| Abstract: | We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process. |
| Keywords: | Terms of trade;Business cycles;Developed countries;Emerging markets;Panel analysis;Time series;Econometric models;terms of trade; external adjustment; current account |
| Date: | 2017–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/29&r=opm |
| By: | Ibrahim Elbadawi; Eman Refaat (Dubai Economic Council) |
| Abstract: | This paper develops a theoretical model that allows for assessing the poverty impact of the real exchange rate (RER), as an economy-wide relative price, in a fully optimizing model at the household and the firm levels. The model motivates empirical estimation of the response of average household wage and non-wage incomes to RER depreciation/undervaluation. In particular, it is possible to assess the extent to which an RER undervaluation (or RER depreciation) is pro-poor, using a precise metric that compares the rate of change of the income of the poor relative to that of the non-poor in response to RER devaluation/depreciation. We estimate the model using national-level panel data from the Egyptian Central Agency for Public Mobilization and Statistics and the ERF’s data bank. We find robust evidence suggesting that strategic real currency depreciation/undervaluation at the macroeconomic level promotes pro-poor income growth at the household level. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:966&r=opm |
| By: | Ibhagui, Oyakhilome |
| Abstract: | Do government spending patterns and composition tell us anything about the behaviour of the real exchange rate in Sub-Saharan Africa? We develop a simple 2-sector small open economy model which shows that government spending and productivity differential are associated with the real exchange rate appreciation. Using a panel of Sub-Saharan Africa (SSA) countries, we perform a coordinated empirical analysis that overwhelmingly confirms the predictions of the model. Next, we disaggregate government spending into three major components - consumption, investment and transfer payments – and check whether the composition of government spending provides any insight into the dynamics of the real exchange rate in SSA. Our results suggest a yes. In particular, government consumption and transfer payments generate real appreciation, while government investment depreciates the real exchange rate. These findings are robust in magnitude and signed direction, but their effects are not always significant. We also show that the composition of government spending provides a good insight into the effects of government spending shocks in the short run, but the short and long run effects of fiscal shocks are in general not equivalent |
| Keywords: | Sub-Saharan Africa, government spending, spending composition, and the real exchange rate |
| JEL: | F3 F31 |
| Date: | 2017–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77291&r=opm |
| By: | Michael Curran (Villanova University); Adnan Velic (Dublin Institute of Technology) |
| Abstract: | This paper examines the persistence of real exchange rates across the world. We employ univariate time series techniques on a country-by-country basis allowing for deterministic structural breaks and nonlinearities in the adjustment process. Our findings suggest that bilateral exchange rates and industrial countries display the highest rates of persistence. We retrieve evidence indicating that higher inflation, nominal exchange rate volatility, trade openness and proximity to reference country are associated with faster rates of real exchange rate convergence. Conversely, international financial integration is only found to be a significant factor at the country group level, with differential effects across cohorts. |
| Keywords: | Real Exchange Rate, Parity Deviations, Cross-Country Persistence Differences, Structural Determinants |
| JEL: | F31 F41 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0917&r=opm |