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on Open Economy Macroeconomics |
| By: | Mark Aguiar; Satyajit Chatterjee; Harold Cole; Zachary Stangebye |
| Abstract: | We revisit self-fulfilling rollover crises by introducing an alternative equilibrium selection that involves bond auctions at depressed but strictly positive equilibrium prices, a scenario in line with observed sovereign debt crises. We refer to these auctions as “desperate deals,” the defining feature of which is a price schedule that makes the government indifferent to default or repayment. The government randomizes at the time of repayment, which we show can be implemented in pure strategies by introducing stochastic political payoffs or external bailouts. Quantitatively, auctions at fire-sale prices are crucial for generating realistic spread volatility. |
| JEL: | E6 F34 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23312&r=opm |
| By: | Yin-Wong Cheung; Menzie D. Chinn; Antonio Garcia Pascual; Yi Zhang |
| 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: | F31 F47 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23267&r=opm |
| By: | Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri |
| 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 arbitrage in international capital markets. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve its 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. |
| JEL: | F31 F32 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23266&r=opm |
| By: | Zsolt Darvas |
| Abstract: | This paper compares financial assistance programmes of four euro-area countries (Greece, Ireland, Portugal, and Cyprus) and three non-euro-area countries (Hungary, Latvia, and Romania) of the European Union in the aftermath of the 2007/08 global financial and economic crisis—which were supported by the International Monetary Fund (IMF) and various European financing facilities. These programmes have distinct features compared with assistance programmes in other parts of the world, such as the size of imbalances, financing, unique cooperation of the IMF and various European facilities, and membership of a currency union in the case of euro-area countries. We evaluate the programmes by assessing their success in creating conditions to regain market access, the degree of compliance with loan conditionality, and actual economic performance relative to programme assumptions. We conclude that the rate of compliance with loan conditionality was not a good predictor of programme success and that deviations from gross domestic product programme assumption correlate strongly with fiscal performance and unemployment, highlighting the key role of macroeconomic projections in programme design. While the Troika institutions succeeded in cooperating, there were major disputes among them in some cases, especially related to the assessment of fiscal sustainability and cross-country spillovers. Asian countries can draw several lessons from European experiences, including the coexistence of the IMF and regional safety nets, cooperation issues, systemic spillovers, and social implications of programme design. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:20227&r=opm |
| By: | Lorenzo Caliendo; Fernando Parro; Aleh Tsyvinski |
| Abstract: | We develop a model of the world economy as input-output relationships subject to distortions. We then propose a methodology to solve the identification problem, common to the literature on misallocation in input-output relationships, of separating sectoral TFPs from the sectoral distortions. Using both the input shares and the consumption shares within the CES production and CES consumption structure we derive simple closed-form sufficient statistics for the sectoral distortions and for the sectoral TFPs. We then derive a closed-form solution of the elasticities of each entry in the world input-output matrix to distortions. We compute a total of more than half a million internal distortions and TFPs and document significant heterogeneity of those across countries and sectors. We then calculate the whole matrix of about two million elasticities to distortions and TFPs of the input-output matrix of the world economy. We show that internal (within a given country) distortions significantly affect the structure of the economy of that country and have sizeable cross effects on the input-output matrix of other countries. We then find that the world GDP elasticity to changes in internal distortions is an order of magnitude larger than that of the external distortions. |
| JEL: | C67 E00 E1 F00 O11 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23332&r=opm |
| By: | Michael Curran (Department of Economics, Villanova School of Business, Villanova University); Adnan Velic (Dublin Institute of Technology) |
| Abstract: | Employing relatively novel computational techniques, this paper examines the relation between real interest rate volatility and macroeconomic dynamics for a diverse panel of countries. Empirically, we find that interest rate volatility is quite high and persistent overall, with estimates exhibiting non-negligible heterogeneity across countries. Moreover, we highlight that volatility increases at higher interest rate levels, while it is negatively correlated with measures of macroeconomic performance such as output, consumption and investment. Our analysis demonstrates that the empirical facts can be generated by a DSGE model augmented with stochastic volatility shocks. |
| Keywords: | interest rates; stochastic volatility; persistence; macroeconomic dynamics; general equilibrium models |
| JEL: | C11 E13 E32 E43 E44 F41 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:35&r=opm |
| By: | Cozzi, Guido; Davenport, Margaret |
| Abstract: | How long shall a country take to learn the world technological frontier? What would happen if that country found the same difficulties in learning the true model of its economy? After all, countries catching up often experience life-changing transformations during the catch-up to a balanced growth path. We show that an open economy, learning rational expectations alongside foreign technology, may be characterized by excessive saving and current account surpluses, as often observed in the data and at odds with the standard open economy theoretical predictions, and not fully explained by standard adaptations such as habit formation. Moreover, such a learning process in a large developing country can upset the savings behavior of a fully rational expectations advanced country. In a US-China calibration, we show that this effect can be so strong as to explain important current account imbalances, the savings glut hypothesis, as well as the distribution of factor income. |
| Keywords: | capital flows, extrapolative expectations, global imbalances, technological convergence |
| JEL: | E03 F21 F41 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78016&r=opm |
| By: | Emiliano Libman (Centre for the Study of State and Society, Buenos Aires, Argentina.); Juan Antonio Montecino (Department of Economics, University of Massachusetts, Amherst); Arslan Razmi (Department of Economics, University of Massachusetts, Amherst) |
| Abstract: | Existing empirical studies have focused on determinants of investment. We focus instead on episodes of accelerated capital stock growth that last eight years or longer. We find that episodes are relatively common, even in low growth regions, but more so in middle income and Asian countries. After identifying 175 such episodes between 1950-2014, we employ probit analysis to explore their characteristics. Turning points in investment tend to be preceded by undervalued real exchange rates, macroeconomic stability (low inflation), and net capital outflows (especially portfolio outflows). We also find strong evidence for a negative correlation with the capital to output ratio and per capita GDP, and a positive correlation with a human capital index. Investment surges appear to be associated with accelerated structural change in the economy. |
| Keywords: | Investment, accumulation, real exchange rate, terms of trade |
| JEL: | E22 F41 E20 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2017-09&r=opm |
| By: | Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University) |
| Abstract: | When does the combination of flexible exchange rates and inflation-targeting monetary policy guarantee insulation from global financial conditions? We examine a dynamic global game model of international investment flows where, for some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by abrupt reversals where capital outflows go hand-in-hand with currency depreciation, a domestic bond market crash, and inflationary pressure. |
| Keywords: | Currency appreciation; Capital flows; Global games |
| JEL: | F32 F33 F34 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2si2ds9f2b9l9qf0lhcuotcfj9&r=opm |
| By: | Choi, Woo Jin; Taylor, Alan M. |
| Abstract: | We document a new international stylized fact describing the relationship between real exchange rates and external asset holdings. Economists have long argued that the real exchange rate is associated with the net international investment position, appreciating as external wealth increases. This mechanism has been seen as central for international payments equilibrium and relative price adjustments. However, we argue that the effect of external assets held by the public sector -reserve accumulation- on real exchange rates may be quite different from that of privately held external assets, and that capital controls are a critical factor behind this difference. For 1975-2007, controlling for GDP per capita and the terms of trade, we find that a one percentage point increase in external assets relative to GDP (net of reserves) is related to an 0.24 percent real exchange rate appreciation. On the contrary, a one percentage point increase in reserve accumulation relative to GDP has virtually no effect on the real exchange rate in financially open countries (low capital controls), and is related to a 1.65 percent real exchange rate depreciation in financially closed countries (high capital controls). Results are stronger in developing countries and in more recent periods. Gross rather than net positions matter and we present a new theoretical model to account for the stylized fact. The framework encompasses so-called precautionary and mercantilist motives for reserve accumulation, and also explains how the optimal capital account policy -the mix of reserve accumulation and capital controls- is determined. Further empirical support arises from evidence that reserve accumulation is associated with a trade surplus, along with higher GDP and TFP growth in countries with high capital controls, findings that are consistent with the mechanisms of our model. |
| Keywords: | capital controls; economic growth.; Financial crises; International Reserves; real exchange rates; Trade |
| JEL: | F31 F38 F41 F43 O24 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11963&r=opm |
| By: | Francisco A. Martínez-Hernández (Department of Economics, State University of New York) |
| Abstract: | Empirical results of the PPP hypothesis have constantly shown that relative prices do not converge to the same level, neither in the short nor the long run. Therefore the PPP explanation of the determination of the real exchange rate is not operative to get a reasonable measure of competitiveness at the international level. In this paper, we put forth a different approach based on the works of Ricardo, Marx, Harrod, and Shaikh, which argues that the real relative unit labor cost is the main force that explains the long-run behavior of the real exchange rate. In the second section of the paper we explain the theoretical underpinnings of our proposed approach. In the third section we analyze the role of the real interest rate differential in explaining real exchange rate misalignments. In the fourth section, we present a graphical analysis of the interrelation among the real effective exchange rate, the real unit labor cost ratio, the short-run real interest rate differential, and the trade balance for sixteen OECD countries, Taiwan, and three developing countries for the period 1960-2010. In the fifth section we investigate the long-run relationship between the latter three indexes through cointegrating and error correction models using the ARDLECM framework. The last section provides our conclusions. |
| Keywords: | Real adjusted unit labor cost, real effective exchange rate, real interest rate differential, trade balance, ARDL-ECM models. |
| JEL: | B12 B51 F50 F31 F41 C32 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1716&r=opm |
| By: | Giacomo Candian |
| Abstract: | The paper provides a novel explanation for the observed large and persistent fluctuations in real exchange rate dynamics using a flexible-price model with dispersed information among firms. The paper extend the imperfect common knowledge model developed by Woodford (2002) and Melosi (2014) to a two-country environment. The model is estimated on US and European data using Bayesian methods. The model successfully explain the volatility and persistence of the US/Euro Area real exchange rate, as well as its high correlation with the nominal exchange rate. In line with the empirical evidence, the estimated model delivers hump-shaped dynamics for real exchange rate and highly persistent effect of monetary disturbances. A battery of results shows that the model with information frictions outperforms traditional sticky-price models of real exchange rates. |
| Keywords: | US and the Euro Area, Monetary issues, General equilibrium modeling |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:009007:9106&r=opm |