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on Open Economy Macroeconomics |
| By: | Michal Szkup (The University of British Columbia); Fernando Leibovici (Federal Reserve Bank of St. Louis); David Kohn (Universidad Catolica de Chile) |
| Abstract: | We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms and idiosyncratic productivity shocks, where firms face financing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation affects firms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more profitable. On the other hand, it tightens the borrowing constraint by increasing the value of foreign-denominated debt relative to firms’ net worth. We calibrate the model to match key features from plant-level data and use it to quantify the importance of these channels. We find that financial frictions slow down the response of aggregate exports, and foreign-denominated debt amplifies this effect by decreasing firms’ net worth on impact. However, we find that these channels can only explain a small fraction of the dynamics of exports observed in the data. While financial frictions and balance-sheet effects distort production and investment decisions, exports are significantly less affected as firms reallocate sales across markets in response to the change in the real exchange rate. We document the importance of cross-market reallocation for export dynamics using firm-level data from Mexico’s devaluation in 1994. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:859&r=opm |
| By: | Raouf Boucekkine (Aix-Marseille University (IM_eRA and AMSE), CNRS and EHESS, and senior member of the Institut Universitaire de France); Benteng Zou (CREA, Université du Luxembourg) |
| Abstract: | International risk sharing is one of the main arguments in favor of financial libera- lization. The pure risk sharing mechanism highlighted by Obstfeld (1994) implies that liberalization is growth enhancing for all countries as it allows the world port- folio to shift from safe low-yield capital to riskier high yield capital. This result is obtained under the assumption that the volatility figures for risky assets prevailing under autarky are not altered after liberalization. This note relaxes this assump- tion within the standard two-country model with intertemporal portfolio choices, formally incorporating the instability effect invoked by Stiglitz (2000). We show that putting together the pure risk sharing and instability effects in the latter set-up enriches the analysis and delivers predictions more consistent with the contrasted related empirical literature. |
| Keywords: | Optimal growth, financial liberalization, risk sharing, volatility, |
| JEL: | F21 G15 O16 O41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:17-19&r=opm |
| By: | Hills, Robert (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wong, Eric (Hong Kong Monetary Authority); Wu, Gabriel (Hong Kong Monetary Authority) |
| Abstract: | This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects. |
| Keywords: | International financial linkages; monetary policy transmission; bank lending |
| JEL: | E52 F42 G21 |
| Date: | 2017–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0682&r=opm |
| By: | Dovern, Jonas; Zuber, Christopher |
| Abstract: | We analyze when and how much OECD estimates of potential output are revised after recessions and which factors explain the size of these revisions. Inter alia, we find that following a recession, the OECD substantially revises downwards potential output, those revisions are larger than what is to be expected under the assumption of no hysteresis, and the recession depth, the primary balance, and the current account balance are predictors of post-recession revisions of potential output. |
| JEL: | E32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168180&r=opm |
| By: | Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos |
| Abstract: | This paper analyses the macroeconomic effects of the ECB’s quantitative easing using an open-economy DSGE model estimated with Bayesian techniques. Shock decompositions for real GDP growth and CPI inflation suggest positive contributions of up to 0.4 and 0.5 pp in the standard linearized version of model. Using piecewise linear solution techniques to allow for an occasionally binding zero-bound constraint raises the positive impact on growth and inflation to 0.8 and 0.7 pp. |
| JEL: | E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168060&r=opm |
| By: | Nakatani, Ryota |
| Abstract: | We analyze the relationships among shocks, exchange rate regimes, and capital controls in relation to the probabilities of currency crises. Based on the theoretical model by Nakatani (2016, 2017a), we use panel data on 34 developing countries and apply a probit estimation. We find that both productivity shocks and country risk premium shocks trigger currency crises, whereas productivity shocks are important for severe currency crises. We also find that the effects of these shocks on the probability of a crisis are larger for floating exchange rate regimes and that capital controls mitigate the effects of productivity shocks in pegged regimes. |
| Keywords: | Currency Crisis; Productivity Shock; Risk Premium Shock; Exchange Rate Regimes; Capital Control; Probit Model |
| JEL: | E5 F3 F41 G01 |
| Date: | 2017–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82186&r=opm |
| By: | Dlugoszek, Grzegorz |
| Abstract: | This paper combines the bifurcation theory and the nonlinear moving average approximation to solve asymmetric DSGE models with portfolio choice. Contrary to existing local solution techniques, the proposed method captures the direct effect of risk on agents’ portfolios. The risk-adjusted net and gross asset positions are shown to lie close to the ergodic mean of the global solution. Hence, the method is able to account for asymmetries in the model, which improves accuracy of the approximation. |
| JEL: | E44 F41 G11 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168182&r=opm |
| By: | Alexander Monge-Naranjo; Juan M. Sánchez; Raül Santaeulàlia-Llopis |
| Abstract: | Are production factors allocated efficiently across countries? To differentiate misallocation from factor intensity differences, we provide a new methodology to estimate output shares of natural resources based solely on current rent flows data. With this methodology, we construct a new dataset of estimates for the output shares of natural resources for a large panel of countries. In sharp contrast with Caselli and Feyrer (2007), we find a significant and persistent degree of misallocation of physical capital. We also find a remarkable movement toward efficiency during last 35 years, associated with the elimination of interventionist policies and driven by domestic accumulation. Interestingly, when both physical and human capital can be reallocated, capital would often flow from poor to rich countries. |
| Keywords: | natural rents, factor shares, misallocation, international flows, human capital |
| JEL: | O11 O16 O41 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:994&r=opm |
| By: | Caballero, Julián; Fernández, Andrés |
| Abstract: | We document a considerable increase in foreign financing by the corporate sector in emerging economies (EMEs) since the early 2000s, mainly in the form of bond issuance, and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies. Such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several EMEs using micro-level data on spreads of bonds issued by EMEs’ corporations in foreign capital markets. Three salient features characterize such a negative relationship. First, the financial indicator has considerable predictive power on future economic activity in these economies, even after controlling for other potential drivers of economic activity such as movements in sovereign risk and global financial risk, among others. Second, on average, an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies, and between 11 to 20 percent of its forecast error variance is associated to this shock. Lastly, fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets, thereby implying that changes of our indicator also serve as a powerful propagating mechanism to changes in global investors’ appetite for risk. |
| JEL: | E32 E37 F34 F37 G15 |
| Date: | 2017–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_031&r=opm |
| By: | Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks. Easier capital control regimes enhance the attenuation and amplification properties associated with each capital control, whilst strict regimes do the opposite. Lastly, the analysis shows that the welfare effects of capital controls are agent dependent, and that society prefers the outflow capital control to the inflow capital control. Taken together, these results are indicative of the comparative desirability of capital controls imposed on the financial sector (outflows) as compared to the real sector (inflows). |
| Keywords: | Capital controls, Welfare, Wealth, Real business cycle, Financial intermediation, DSGE |
| JEL: | E21 E32 E43 E44 E51 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers288&r=opm |
| By: | Hudgins, David; Crowley, Patrick M. |
| Abstract: | This paper develops a wavelet-based control system model that can be used to simulate fiscal and monetary strategies in an open economy context in the time-frequency domain. As the emphasis on real exchange rate stability is increased, the model simulates the effects on both the aggregate and decomposed trade balance under both constant and depreciating real exchange rate targets, and also the effects on the real GDP expenditure components. This paper adds to recent research in this area by incorporating an external sector via the use of a real effective exchange rate as a driver of output. The research is also the first to analyze exchange rate effects within a time-frequency model with integrated fiscal and monetary policies in an open-economy applied wavelet-based optimal control setting. To demonstrate the usefulness of this model, we use post-apartheid South African macro data under a political targeting design for the frequency range weights, where we simulate jointly optimal fiscal and monetary policy under varying preferences for real exchange rate stability. |
| JEL: | C61 C63 C88 E52 E61 F47 |
| Date: | 2017–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_032&r=opm |
| By: | Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian |
| Abstract: | The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix. |
| Keywords: | eurobond; Government bonds; Joint Analysis of Fiscal and Monetary Policy; Lower Bound on Nominal Interest Rates; Self-Fulfilling Sovereign Default |
| JEL: | E31 E62 E63 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12371&r=opm |
| By: | Matsuyama, Kiminori |
| Abstract: | Endogenous demand composition across sectors due to nonhomothetic demand (Engel's Law) affects i) sectoral compositions in employment and in value-added, ii) variations in innovation rates and in productivity change across sectors, iii) intersectoral patterns of trade across countries, and iv) migration of industries from rich to poor countries. This paper offers a unifying perspective on how economic growth and globalization affects the patterns of structural change, innovation and trade across countries and across sectors in the presence of Engel's Law. To this end, we develop a two-country model of directed technological change with a continuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions. Among the main messages is that globalization amplifies, instead of reducing, the power of endogenous domestic demand composition differences as a driver of structural change. |
| Keywords: | Factor price convergence; Implicit (direct and indirect) additivity; Isoelastically nonhomothetic CES; Leapfrogging; log-supermodularity; Monotone comparative statics; The Linder effect; The Schmookler effect; Trade patterns reversal; Vernon's product cycle hypothesis |
| JEL: | O11 O19 O33 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12387&r=opm |