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on Open Economy Macroeconomics |
| By: | Oleg Itskhoki; Dmitry Mukhin |
| Abstract: | We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith puzzle, and the UIP puzzle. The model has two main building blocks — the driving force (or the exogenous shock process) and the transmission mechanism — both crucial for the quantitative success of the model. The transmission mechanism — which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption — is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the financial sector to address the additional Mussa puzzle and Engel’s risk premium puzzle. |
| JEL: | E30 F30 F4 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23401&r=opm |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | Modern open economy macro models assume the continuous adjustment of international portfolio allocation. We introduce gradual portfolio adjustment into a global equity market model. Our approach differs from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fixed, leading to a smoother response to shocks. Second, rather than only considering asset returns, we also use data on portfolio shares to confront the model to the data. Conditional on reasonable risk aversion, we find that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average. |
| JEL: | F30 F41 G11 G12 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23363&r=opm |
| By: | Pilar Beneito (Department of Economic Analysis, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).); Carlos Chafer (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).) |
| Keywords: | current account imbalances, cost competitiveness, EMU, diff-in-differences |
| JEL: | F32 F45 C21 C23 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1703&r=opm |
| By: | Alessandro Ferrari; Anna Rogantini Picco |
| Abstract: | This paper aims at empirically assessing the effect of the adoption of the euro on the ability of euro area member states to smooth consumption and share risk. With the objective of evaluating the economic performance of euro area countries in the scenario where the euro had not been adopted, we construct a counterfactual dataset of macroeconomic variables via the Synthetic Control Method. In order to get some preliminary measures of risk sharing, we first compute bilateral consumption correlations and Brandt-Cochrane- Santa Clara Indexes across euro area member states. We then decompose risk sharing in different channels by means of the Asdrubali, Sorensen and Yosha (1996) output decomposition. Our preliminary measures and our decomposition of risk sharing are computed with both actual and synthetic data so as to identify whether there has been any effect of the adoption of the euro on risk sharing and through which channels it has occurred. We find that the euro has not affected the level of risk sharing across euro area countries, but has partially reduced the ability of member states to smooth consumption. We attribute this change to the higher GDP growth generated by the adoption of the euro, which has been accompanied by a greater output volatility. We also report differential effects for core and periphery countries, showing that the former have not suffered any negative effects from the adoption of the euro in terms of risk sharing. |
| Keywords: | Risk Sharing Mechansims, Consumption Smoothing Channels, Euro Area, Synthetic Control Method |
| JEL: | F32 F36 F41 |
| Date: | 2016–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:17&r=opm |
| By: | Marcin Bielecki (Narodowy Bank Polski, University of Warsaw); Michał Brzoza-Brzezina (Narodowy Bank Polski, Warsaw School of Economics); Marcin Kolasa (Narodowy Bank Polski, Warsaw School of Economics); Krzysztof Makarski (Narodowy Bank Polski, Warsaw School of Economics) |
| Abstract: | Boom-bust cycles in the eurozone periphery almost toppled the common currency and recent experience suggests that they may return soon. We check whether monetary or macroprudential policy could have prevented the periphery’s violent boom and bust after the euro adoption. We estimate a DSGE model for the two euro area regions, core and periphery, and conduct a series of historical counterfactual experiments in which monetary and macroprudential policy follow optimized rules that use area-wide welfare as the criterion. We show that common monetary policy could have better stabilized output in both regions, but not the housing market or the periphery’s trade balance.In contrast, region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances. |
| Keywords: | euro-area imbalances, monetary policy, macroprudential policy, Bayesian estimation |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:263&r=opm |
| By: | Alexander MONGE-NARANJO; UEDA Kenichi |
| Abstract: | Based on historical data since 1845, we identify a stylized fact, namely, alternating waves in global imbalances generated by sequential industrial revolutions. We develop a new theory to explain this stylized fact. Our theory proposes a development-stage view for the optimal global imbalances. It explains the Lucas Paradox on capital flows as well as rises and falls in the external wealth of nations over time. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:17067&r=opm |
| By: | Kreickemeier, Udo; Wrona, Jens |
| Abstract: | In their famous paper on the "Big Push", Murphy, Shleifer, and Vishny (1989) show how the combination of increasing returns to scale at the firm level and pecuniary externalities can give rise to a poverty trap, thereby formalising an old idea due to Rosenstein-Rodan (1943). We develop in this paper an oligopoly model of the Big Push that is very close in spirit to the Murphy-Shleifer-Vishny (MSV) model, but in contrast to the MSV model it is easily extended to the case of an economy that is open to international trade. Having a workable open-economy framework allows us to address the question whether globalisation makes it easier or harder for a country to escape from a poverty trap. Our model gives a definite answer to this question: Globalisation makes it harder to escape from a poverty trap since the adoption of the modern technology at the firm level is impeded by tougher competition in the open economy. |
| Keywords: | Poverty Traps,Multiple Equilibria,International Trade,Technology Upgrading,General Oligopolistic Equilibrium |
| JEL: | F12 O14 F43 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:249&r=opm |
| By: | Samer Shousha |
| Abstract: | Why do emerging market economies simultaneously hold very high levels of international reserves and foreign liabilities? Moreover, why, even with such huge amounts of international reserves, did countries barely use them during the Global Financial Crisis? I argue that including international reserves as an implicit collateral for external borrowing in a small open economy model subject to exogenous financial shocks can explain both of these puzzling facts. I find that the model can obtain ratios of international reserves and net foreign liabilities to GDP similar to those of Latin American countries. Additionally, the optimal policy implies that the government accumulates international reserves before a sudden stop and that there is a small depletion during it. Finally, an alternative policy of keeping international reserves constant at the average level yields results very similar to those of the optimal policy during sudden stops, highlighting the stabilizing role of international reserves even if central banks do not use them. |
| Keywords: | International reserves ; Emerging market economies ; Sudden stops ; International crises |
| JEL: | F32 F34 F41 |
| Date: | 2017–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1205&r=opm |
| By: | Phiri, Andrew |
| Abstract: | In this study we examine the effects of the 2007-2008 global financial crisis on the Feldstein-Horioka coefficient for South Africa using momentum threshold cointegration and error correction techniques applied to quarterly national savings-investment time series collected between 2000:Q1 and 2017:Q1. Our empirical strategy consists of segregating the data into three samples; one corresponding to the full sample (1960:Q1 – 2016:Q4), another corresponding to the pre-crisis period (1960:Q1-2008:Q3) and the last corresponding to the post-crisis period (2008:Q4-2016:Q4). Our empirical results validate asymmetric cointegration effects for both the full and the pre-crisis periods while only accepting a linear cointegration relation for the post-crisis period. The saving-retention coefficient estimates produced are 0.59 (significant), 0.64 (significant), and 0.22 (insignificant) for the full, pre-crisis and post-crisis periods, respectively. These results imply that international capital mobility has increased in the post-crisis period and this may be primarily due to the effects of a redirection of private capital flows by investors to safe haven assets. Therefore policy plans of further relaxing of capital controls is inadvisable considering that capital is already highly mobile. |
| Keywords: | Investment; Savings; Feldstein-Horioka puzzle; Threshold cointegration; Threshold error correction model; Sub-Saharan Africa; South Africa |
| JEL: | C22 C52 F21 F41 |
| Date: | 2017–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79096&r=opm |
| By: | Hohberger, Stefan; Priftis, Romanos; Vogel, Lukas |
| Abstract: | This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively. |
| Keywords: | E44, E52, E53, F41 |
| JEL: | E44 E52 F41 |
| Date: | 2017–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:78955&r=opm |