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on Open Economy Macroeconomics |
| By: | Woo Jin Choi; Alan M. Taylor |
| 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. |
| JEL: | F31 F38 F41 F43 O24 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23341&r=opm |
| By: | Hyeongwoo Kim; Yunxiao Zhang |
| Abstract: | This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical findings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price fluctuations in the short-run because adjustments of the supply can be limited, but have much weaker effects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting effects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock. |
| Keywords: | Commodity Prices; Price Stickiness; Dynamic Elasticity; Vector Autoregression; Impulse-Response Function; Kernel Density |
| JEL: | E31 F31 Q02 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2017-02&r=opm |
| By: | López-Martín Bernabé; Leal-Ordoñez Julio C.; Martínez André |
| Abstract: | Commodity prices are an important driver of fiscal policy and the business cycle in many developing economies. We analyze a dynamic stochastic small-open-economy model of sovereign default, featuring endogenous fiscal policy and stochastic commodity revenues. The model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates. We quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues. An event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities. |
| Keywords: | commodity revenues;hedging;indexed bonds;fiscal policy;sovereign default |
| JEL: | F34 F41 F44 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2017-04&r=opm |
| By: | Carlos Eduardo Gonçalves; Mauro Rodrigues |
| Abstract: | The impact of real exchange rate movements on GDP growth is a hotly debated issue both in policy and academic circles. In this paper we provide evidence suggesting that there is not a robust statistical association between misalignment and growth for a broad panel of countries. Controlling for country fixed effects, time effects and initial GDP, a more depreciated currency is associated with higher growth. However, this positive association vanishes after controlling for the savings rate. We do not find such positive relationship either for large panel of countries or for a subsample of emerging economies. |
| Keywords: | Real exchange rate; growth; misalignment |
| JEL: | F31 F43 O47 |
| Date: | 2017–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2017wpecon07&r=opm |
| By: | Mario J. Crucini; Mario Anthony Landry |
| Abstract: | The classical dichotomy predicts that all of the time-series variance in the aggregate real exchange rate is accounted for by non-traded goods in the consumer price index (CPI) basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) claimed the opposite: that traded goods accounted for all of the variance. Using micro-data and recognizing that final good prices include both the cost of the goods themselves and local, non-traded inputs into retail such as labor and retail space, our work re-establishes the conceptual value of the classical dichotomy. We also carefully show the role of aggregation, consumption expenditure weighting and assignment of covariance terms in the differences between our findings and those of Engel. |
| Keywords: | Exchange rates, International financial markets, Trade Integration |
| JEL: | F3 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-12&r=opm |
| By: | Dedola, Luca; Rivolta, Giulia; Stracca, Livio |
| Abstract: | This paper studies the international spillovers of US monetary policy shocks on a number of macroeconomic and financial variables in 36 advanced and emerging economies. In most countries, a surprise US monetary tightening leads to depreciation against the dollar; industrial production and real GDP fall, unemployment rises. Inflation declines especially in advanced economies. At the same time, there is significant heterogeneity across countries in the response of asset prices, and portfolio and banking cross-border flows. However, no clear-cut systematic relation emerges between country responses and likely relevant country characteristics, such as their income level, dollar exchange rate flexibility, financial openness, trade openness vs. the US, dollar exposure in foreign assets and liabilities, and incidence of commodity exports. JEL Classification: F3, F4 |
| Keywords: | capital mobility, exchange rate regime, identification of monetary shocks, international transmission, trilemma |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172050&r=opm |
| By: | Radosevic, Dubravko |
| Abstract: | When the financial crisis revealed weaknesses in eurozone governance, EU responded with new prevention and crisis resolution governance structure and counter-cyclical policies. A new surveillance procedure for the prevention and correction of macroeconomic imbalances, the so called Macroeconomic Imbalance Procedure (MIP). The EC has recognized the existence of excessive imbalances that requires strong and comprehensive policy measures to undertake significant adjustments. International competitiveness indicators and policy instruments are the most important for correction of external imbalances. This is also one of the major challenges in the euro zone – the symmetric adjustment of the intra – euro area competitiveness divergences and external imbalances. For non – euro area EU members, monetary strategies and exchange rate policies are highly important instruments of adjustment process. Spillover effects of financial crisis in EU periphery (non – EMU economies) could be damaging for the eurozone economies. The European economic governance mechanisms are inconsistent with specific position of the non - euro area countries of the EU. The aim of this policy paper is to analyze European economic governance for non – euro area members. Our reform proposals are based on the two basic areas of improvements in European economic governance for non – EMU members of the EU: (a) new approach to the European Semester, and (b) new financial assistance facilities for non – euro area countries, in order to reduce contagion risk in EU. |
| Keywords: | European Union debt crisis, European economic governance, EU conditionality, European Semester, spill – over effects, external adjustment mechanisms, crisis mechanisms for non – EMU economies, Brexit, Italy’s banking crisis, ECB, Target 2 |
| JEL: | B5 B50 E60 E61 F30 F33 F36 F4 F42 H1 H12 |
| Date: | 2016–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78613&r=opm |
| By: | Njindan Iyke, Bernard; Ho, Sin-Yu |
| Abstract: | Using linear and nonlinear specifications, we studied the effects of real exchange rate changes on the trade balance of Ghana during the period 1986Q1 to 2016Q3. We found no evidence in support of the short- and long-run impact of exchange rate changes on the trade balance in the linear specification. The J-curve is refuted in this case. In contrast, exchange rate changes affected the trade balance in the nonlinear specification. Depreciations improve the trade balance in the long run, but appreciations have no impact. Hence, exchange rate changes have nonlinear effects on the trade balance. This is consistent with the J-curve phenomenon. |
| Keywords: | Trade balance; J-curve; real exchange rates; nonlinearities; Ghana. |
| JEL: | C22 F31 F32 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78211&r=opm |
| By: | Noel Rapa (Central Bank of Malta) |
| Abstract: | This paper describes MEDSEA, a compact small open economy DSGE model of the Maltese economy. The model is similar in nature to other small open economy models, thus containing a number of nominal and real frictions allowing the model to replicate the sluggish reaction of economic variables documented in empirical research. Moreover, MEDSEA contains key modifications designed to account for Malta’s specific characteristics. The model distinguishes between a tradable and non-tradable sector reflecting the different nature of exports when compared to other production meant for domestic use. Furthermore, the model features distribution costs in the export sector allowing for a wedge to exist between wholesale and retail export prices. |
| JEL: | E12 E30 E50 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:mlt:wpaper:0516&r=opm |