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on Open Economy Macroeconomics |
| By: | Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio |
| Abstract: | We study how a monetary authority pursues an exchange rate objective in an environment that features a zero lower bound (ZLB) constraint on nominal interest rates and limits to international arbitrage. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve it exchange rate objective by choosing that interest rate, a well-known result in international finance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital inflows, and welfare costs associated with the accumulation of foreign reserves by the central bank. In this latter case, all changes in external conditions that increase inflows of capital toward the country are detrimental, while policies such as negative nominal interest rates or capital controls can reduce the costs associated with an exchange rate policy. We provide a simple way of measuring these costs, and present empirical support for the key implications of our framework: when interest rates are close to zero, violations in covered interest parity are more likely, and those violations are associated with reserve accumulation by central banks. |
| Keywords: | Capital Flows; CIP Deviations; Currency Pegs; Foreign Exchange Interventions; International Reserves; Negative Interest Rates |
| JEL: | F31 F32 F41 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11928&r=opm |
| By: | Kollmann, Robert (Université Libre de Bruxelles) |
| 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 commove positively. |
| JEL: | F31 F32 F36 F41 F43 |
| Date: | 2017–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:307&r=opm |
| By: | Cao, Shutao |
| Abstract: | Many economies experienced a slowdown of measured productivity in the 2000s, coinciding with the commodity price boom. We use a multisector growth model for a small open economy to quantify the contribution of sector-specific technology and relative prices of trade to productivity slowdown. We show that the effective aggregate total factor productivity consists of two components: the weighted average of sector-specific technology, and the weighted averaged of domestic-export price ratios which reflect export costs. This extends the Domar aggregation result of Hulten (1978). When calibrated to the Canadian data, the model suggests that productivity slowdown was mainly attributed to two sectors: commodity; machinery and equipment. Cross-country data show that, in two thirds of countries that experienced productivity slowdown, slower productivity growth in sectors serving domestic market was a dominant factor, while in the other one third, reduced domestic-export price ratio played a major role. |
| Keywords: | Productivity measurement, Sector-specific technological change, Input-output linkage, Relative price, |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:6203&r=opm |
| By: | Raphael 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 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:623&r=opm |
| By: | Malgorzata Skibinska |
| Abstract: | The standard frictionless real business cycle model assumes that the wage should be equal to the firms’ marginal product of labour and the households’ marginal rate of substitution . However, the data indicates that this relationship does not hold and that the labour wedge, defined as a gap between these two objects, is characterized by large cyclical variations. This paper aims to identify the factors which might contribute to the differences in the volatilities of the labour wedge across CEE region and the EA. We look at the labour wedge through the lens of a small open economy real business cycle model with search and matching frictions on the labour market. The constructed model is estimated with Bayesian methods separately for Poland, the Czech Republic and the Euro Area and used to decompose variance of the labour wedge and perform some counterfactual simulations. Firstly, we show that the forces driving the labour wedge volatility differ across the analysed economies. While the dynamics of the gap between MRS and MPL in Poland can be attributed mainly to labour market disturbances, the consumption preference shock is the main force behind the wedge variability in the Euro Area and the Czech Republic. The bigger role of the labour market disturbances in Poland may suggest that the labour market in this country functions less smoothly, with negative consequences for welfare. Secondly, our results indicate that the differences in volatilities of the labour wedge in the analysed economies result primarily from the distinct characteristics of stochastic disturbances. However, in Poland the labour market structure also plays some role in explaining the differences vis-à-vis the EA. More precisely, lower, as compared to the Eurozone, elasticity of the matching function with respect to unemployment and higher workers’ bargaining power raise the volatility of the labour wedge in this country. The impact of heterogeneity in these parameters between the EA and the Czech Republic is rather marginal. All in all, we find heterogeneity in the labour wedge fluctuations within the CEE region. The Czech Republic seems to resemble more the EA in terms of both wedge volatility and its driving forces. Our results suggest that the labour market frictions in Poland are relatively more severe and generate fluctuations that are more harmful for social welfare. |
| Keywords: | Poland, Czech Republic, Euro Area, Labor market issues, Business cycles |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:009007:9061&r=opm |
| By: | Wirasti, Anisha; Widodo, Tri |
| Abstract: | This paper aims to empirically examine the Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis in the case of Indonesia. The cointegration result shows that fiscal imbalances, investment and current account imbalances have a long run relationship. Autoregressive Distributed Lag (ARDL) and Autoregressive Distributed Lag-Error Correction Model (ARDL-ECM) approaches are applied to estimate the long run and short run relationships, respectively. The estimation results show that the fiscal imbalances have a positive impact on the current account imbalances in Indonesia. Meanwhile, investments have a negative impact on the current account. Those results indicate that Twin Deficit Hypothesis and Feldstein-Horioka Hypothesis hold in Indonesia. |
| Keywords: | Twin Deficit Hypothesis, Feldstein-Horioka Hypothesis, ARDL, ECM. |
| JEL: | F30 F32 F42 |
| Date: | 2017–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77442&r=opm |
| By: | Keskinsoy, Bilal |
| Abstract: | This paper investigates international capital flows to developing countries for the period 1970-2006. The study focuses on the empirical puzzle that although one would expect international capital to flow to capital scarce countries where returns are higher, observation shows that capital flows to richer rather than to poorer countries (the Lucas paradox). To explore this, total capital is measured as the sum of foreign direct investment and portfolio equity flows. The paper addresses the argument, based on cross-section evidence (Alfaro et al., 2008, Rev. Econ. Stats), that including the quality of institutions accounts for the paradox (because richer countries have better institutions they attract more capital) and finds that this only holds if developed countries are included; within developing countries, institutions do not account for the paradox. Hence, for a consistent sample of 47 developing countries the positive wealth bias in international capital flows or the Lucas paradox is shown to be a persistent phenomenon in the long run. |
| Keywords: | Capital flows, Lucas paradox, Institutional quality, Economic growth, Cross-section OLS |
| JEL: | E02 F41 O16 |
| Date: | 2017–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78126&r=opm |
| By: | Moon, Seongman (Chonbuk National University); Choi , Yoon Sun (Korea Institute for International Economic Policy) |
| Abstract: | This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea's trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant. |
| Keywords: | Current Accout; Exchange Rate; Trade Balance |
| Date: | 2015–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kiepwe:2015_009&r=opm |
| By: | Drago Bergholt; Vegard H Larsen; Martin Seneca |
| Abstract: | The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one - the world's commodity exporters combined are responsible for 15-20% of global value added. We develop and estimate a two-country New Keynesian model in order to quantify the importance of oil price shocks for Norway - a large, prototype petroleum exporter. Domestic supply chains link mainland (nonoil) Norway to the off-shore oil industry, while fiscal authorities accumulate income in a sovereign wealth fund. Oil prices and the international business cycle are jointly determined abroad. These features allow us to disentangle the structural sources of oil price fluctuations, and how they affect mainland Norway. The estimated model provides three key results. First, oil price movements represent an important source of macroeconomic volatility in mainland Norway. Second, while no two shocks cause the same dynamics, conventional trade channels make an economically less significant difference for the transmission of global shocks to the oil exporter than to oil importers. Third, the domestic oil industry's supply chain is an important transmission mechanism for oil price movements, while the prevailing fiscal regime provides substantial protection against external shocks. |
| Keywords: | DSGE, small open economy, oil and macro, Bayesian estimation |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:618&r=opm |
| By: | Christopher G. Gibbs (School of Economics, UNSW Business School, UNSW) |
| Abstract: | This paper shows that a secular stagnation equilibrium as proposed by Eggertsson and Mehrotra (2014) is E-stable. This is in contrast to the often studied liquidity trap equilibrium that exists in representative agent New Keynesian models at the zero lower bound when there is active monetary policy following a Taylor rule. This result reconciles the observed stable low growth and low inflation outcomes since the end of the Global Financial Crisis with the instability predicted by the New Keynesian model using a standard modeling framework. The stability of the secular stagnation equilibrium is due to the assumption of downwardly rigid nominal wages and overlapping generations. At the zero lower bound, the wage friction determines the price level and makes inflation a predetermined variable, while overlapping generations weakens the negative relationship between expected output and the real interest rate. |
| Keywords: | Secular stagnation, Expectations, Adaptive learning, Zero lower bound |
| JEL: | E31 E32 E52 D83 D84 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2017-11&r=opm |
| By: | Malin Gardberg |
| Abstract: | The first objective of the paper is to identify determinants of international consumption risk sharing with a focus on developing countries. International consumption risk sharing is generally lower in developing countries, but the main constraints on international risk sharing in these countries have so far not been identified. As consumption growth in developing countries is generally volatile, and much more so than in advanced economies, there are high potential welfare gains from increased consumption smoothing especially in less developed countries. The second aim of my paper is to exploit the cross-sectional dependence when estimating the degree of international consumption risk sharing between individual countries and country groups. I use a standard risk sharing equation originally developed by Mace (1991), which later on has been modified by among others Hoffman and Nitschka (2009) and Kose et. al (2009) for studying international consumption risk sharing. The study is done using an unbalanced panel of 123 advanced and developing countries from 1970 to 2011. The analysis is also conducted separately for subgroups of advanced, emerging markets and less developed countries to allow for a differential impact of the determinants in the different country groups. In order to correct for potential cross-sectional dependence, I use Pesaran’s CCE estimator which exploits the cross-sectional dependence when estimating the degree of international consumption smoothing. I show that financial integration, measured either as an index of financial reform, capital account openness or as total external liabilities to GDP, has a significantly positive impact on international consumption risk sharing in developing countries. This result applies especially to poorer developing countries. Emerging market countries however seem to have gained less from financial integration in terms of consumption risk sharing. Remittance flows from migrant workers' positively affect risk sharing in developing countries, whereas foreign aid does not have a significant impact. Moreover, there is some evidence that high income inequality and also a high share of low income individuals reduces consumption smoothing in less developed countries. A lower degree of financial integration and higher inequality can thus partly explain why the degree of risk sharing is lower in developing countries than in advanced economies. |
| Keywords: | 123 advanced and developing countries , Macroeconometric modeling, Developing countries |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:009007:9452&r=opm |