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on Open Economy Macroeconomics |
| By: | Pasten, Ernesto; Schoenle, Raphael; Weber, Michael |
| Abstract: | We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States. Both theoretically and empirically, sectoral heterogeneity in price rigidity (i) generates sizable GDP volatility from sectoral shocks, (ii) amplifies both the “granular” and the “network” effects, (iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations, (iv) can change the sign of fluctuations, (v) invalidates the Hulten (1978) Theorem, and (vi) generates a “frictional” origin of aggregate fluctuations. JEL Classification: E31, E32, O40 |
| Keywords: | idiosyncratic shocks, input-output linkages, sticky prices |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172102&r=opm |
| By: | Zorell, Nico |
| Abstract: | Over recent years, several euro area countries have registered large and persistent net foreign liabilities. This paper examines the risks arising from these external stock imbalances, the prospects for their smooth unwinding and the menu of policy options. The paper demonstrates that external stock imbalances remain a source of vulnerabilities in the (former) programme countries and, to a lesser extent, the euro area countries in central and eastern Europe. The net foreign liabilities of these economies stand at levels that are typically associated with an increased susceptibility to external crises. Mechanical projections indicate that the net foreign liabilities of the (former) programme countries will remain at elevated levels over the next decade despite some gradual adjustments, while those of the central and eastern European (CEE) countries could return to more sustainable levels more quickly. There are also vulnerabilities related to the composition of external positions, most notably the unfavourable debt-equity mix in the (former) programme countries. However, the long maturity of public external debt – which is often owed to official creditors – and, in the CEE countries, the prevalence of stable foreign direct investment should mitigate external sustainability risks. Furthermore, the net payments associated with the external positions of the euro area debtor countries are relatively low at the current juncture, although the burden could increase markedly if euro area interest rates were to normalise again. Against this backdrop, a timely and well-designed policy response would provide critical support to the orderly unwinding of the remaining external stock imbalances in the euro area. An optimal policy mix would consist of measures simultaneously fostering GDP growth and sustainable current account improvements in the debtor economies, in particular reforms aimed at enhancing productivity growth and export performance. JEL Classification: F21, F32, F34, F36, F45 |
| Keywords: | external adjustment, external imbalances, external sustainability, international investment positions, valuation effects |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2017198&r=opm |
| By: | Raphael A. Auer; Claudio Borio; Andrew Filardo |
| Abstract: | Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation. |
| Keywords: | globalization, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-output linkages, supply chain |
| JEL: | E31 E52 E58 F02 F41 F42 F14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6387&r=opm |
| By: | Antonia López-Villavicencio (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Marc Pourroy (University of Poitiers, France) |
| Abstract: | This paper estimates the effects of two monetary policy strategies in the exchange rate pass-through (ERPT). To this end, we employ propensity score matching and consider the adoption of a target by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we show that inflation target has helped in reducing the ERPT, with older regimes more successful than younger ones. However, a de facto flexible exchange rate regime has not noticeable advantages to reduce the extent to which exchange rate fluctuations contribute to inflation instability. |
| Keywords: | exchange rate pass-through, inflation targeting, exchange rate regime, propensity score matching |
| JEL: | E31 E42 E52 C30 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1728&r=opm |
| By: | Raphael A. 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 disination and high inflation. |
| Keywords: | international inflation synchronization, globalization, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain |
| JEL: | E31 E52 E58 F02 F14 F33 F41 F42 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6395&r=opm |
| By: | Forti Grazzini, Caterina; Rieth, Malte |
| Abstract: | The paper studies the relation between the US-Dollar/Euro exchange rate and US and euro area interest rates during normal and crisis times. We describe each asset price within a multifactor model and identify the causal contemporaneous relations through heteroskedasticity. We find that US rates and macroeconomic conditions dominate exchange rate and interest rate movements before and during the global financial crisis, while this pattern sharply reverses during the European debt crisis. |
| JEL: | E44 F31 G1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168281&r=opm |
| By: | Belke, Ansgar; Dubova, Irina |
| Abstract: | The paper estimates the financial transmission between bond and equity markets within and between across the four largest global financial markets - the United States, the Euro area, Japan, and the United Kingdom. In a globalized world, where the complex transmission process across various financial assets is not restricted to just domestic market, we argue that international bond and equity markets are highly interconnected both within and across asset classes. |
| JEL: | E52 E58 F42 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168087&r=opm |
| By: | Mario Cimoli; Jose Antonio Ocampo; Gabriel Porcile |
| Abstract: | This paper analyzes the impact of international financial cycles on structural change in developing economies. It is argued that the impact of these cycles depend on the specific combination of macroeconomic and industrial policies adopted by the developing economy. The cases of Brazil and Argentina are contrasted with those of Korea and China. In the Asian economies, macroeconomic policy has been a complementary tool along with industrial policy to foster the diversification of production and capabilities. Inversely, in the case of the Latin American countries, long periods of real exchange rate (RER) appreciation, combined with the weaknesses (or absence) of industrial policies, gave rise to loss of capabilities and lagging behind. Tests of structural break in times series of indexes of technological intensity of the production structure confirm the long run effects of financial shocks in the Latin American case. In the case of Korea there is evidence of hysteresis à la Baldwin-Krugman: a high RER was initially required to export and diversity the economy, but it was no longer necessary when the country had already built indigenous capabilities. |
| Date: | 2017–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2017/26&r=opm |
| By: | Nidhaleddine Ben Cheikh; Christophe Rault |
| Abstract: | In this paper, we evaluate the first-stage pass-through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aims to shed further light on the role of microeconomic factors vs. macroeconomic factors in influencing the extent of the exchange rate pass-through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass-through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross-country differences in pass-through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass-through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass-through. Using the System Generalized Method of Moments within a dynamic panel-data model, our estimates indicate that decline of import-price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first three years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass-through is comprised of both macro- and microeconomic aspects that policymakers should take into account. |
| Keywords: | exchange rate pass-through, import prices, dynamic panel data |
| JEL: | E31 F31 F40 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6366&r=opm |