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on Open Economy Macroeconomics |
| By: | Ayres, Joao Luiz (Inter-American Development Bank); Hevia, Constantino (Universidad Torcuato Di Tella); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis) |
| Abstract: | In this paper, we show that a substantial fraction of the volatility of real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar can be accounted for by shocks that affect the prices of primary commodities such as oil, aluminum, maize, or copper. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated final goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities. |
| Keywords: | Primary commodity prices; Real exchange rate disconnect puzzle |
| JEL: | F31 F41 |
| Date: | 2017–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:743&r=opm |
| By: | Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller |
| Abstract: | We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6--0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country's share of imports invoiced in dollars explains 15% of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms. |
| JEL: | E5 F1 F3 F4 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23988&r=opm |
| By: | Heipertz, Jonas (Paris School of Economics); Mihov, Ilian (INSEAD); Santacreu, Ana Maria (Federal Reserve Bank of St. Louis) |
| Abstract: | Monetary policy research in small open economies has typically focused on “corner solutions”: either the currency rate is fixed by the central bank, or it is left to be determined by market forces. We build an open-economy model with external habits to study the properties of a new class of monetary policy rules in which the monetary authority uses the exchange rate as the instrument. Different from a Taylor rule, the monetary authority announces the rate of expected currency appreciation by taking into account inflation and output fluctuations. We find that the exchange rate rule outperforms a standard Taylor rule in terms of welfare, regardless of the policy parameter values. The differences are driven by: (i) the behavior of the nominal exchange rate and interest rates under each rule, and (ii) deviations from UIP due to a time-varying risk premium. |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-028&r=opm |
| By: | Alexander Guschanski; Engelbert Stockhammer |
| Abstract: | This paper analyses the emergence of current account imbalances as a result of the co-existence of trade flows and financial flows. The literature has tended to view these factors in isolation: many post-Kaleckian models, as well as Net-saving approaches assume that financial flows will adjust to trade flows. Models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows. Similarly, empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows. The paper, first, proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows, determined by price competitiveness, and financial flows, determined by asset prices. Second, we test a reduced form of the model for 28 OECD countries for the period 1971-2014. Our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts, but asset prices have dominated in the last two decades. |
| Keywords: | current account, financial flows, competitiveness, asset prices |
| JEL: | E12 F32 F41 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp1716&r=opm |
| By: | Graciela L. Kaminsky |
| Abstract: | A common belief in both academic and policy circles is that capital flows to the emerging periphery are excessive and ending in crises. One of the most frequently mentioned culprits is the cycles of monetary easing and tightening in the financial centers. Also, many focus on the role of crises in the financial center, pointing to excess international borrowing predating crises in the financial center and global retrenchment in capital flows in its aftermath. I re-examine these views using a newly-constructed database on capital flows spanning 200 hundred years. Extending the study of capital flows to the first episode of financial globalization has two major advantages: During this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for capital flow cycles in the absence of an active role of central banks in the financial centers. Second, panics in the financial center are rare disasters that need to be examined in a longer historical episode. I find that boom-bust capital flow cycles in the periphery are milder in the second episode of financial globalization when the financial center follows a cyclical monetary policy. Also, cyclical monetary policy in the financial center is far more pronounced in times of crises in the financial center, cutting short capital flow bonanzas in the periphery and injecting liquidity in the aftermath of the crisis. |
| JEL: | F30 F34 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23975&r=opm |
| By: | Accominotti, Olivier; Eichengreen, Barry |
| Abstract: | New data documenting European bond issues in major financial centres from 1919 to 1932 show that conditions in international capital markets and not just in borrowing countries are important for explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centres at the end of the 1920s figured importantly in the decline in foreign lending. This article draws parallels with Europe after 2008 |
| JEL: | N0 F3 G3 |
| Date: | 2016–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:84308&r=opm |
| By: | Jan Behringer; Till van Treeck |
| Abstract: | This article brings together the varieties of capitalism and the growth model approaches to comparative political economy to analyze the macroeconomic implications of changes in income distribution. In the decades before the financial crisis, coordinated market economies (CMEs) and liberal market economies (LMEs) developed different but unsustainable growth models which resulted in global current account imbalances. We analyze the relative importance of wage coordination and income distribution in explaining the emergence of global imbalances. We argue that strongly rising top income shares contributed to the decline in household saving and current account balances in major LMEs, whereas pronounced falls in the wage share contributed to the weakness of domestic demand and rising current account balances in CMEs. Wage coordination affected current account balances both directly and, more importantly, indirectly through its effects on income distribution. We test the argument for a sample of 18 industrialized countries over the period 1981-2007. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:09-2017&r=opm |
| By: | Alexander Culiuc; Annette Kyobe |
| Abstract: | Empirical research on structural reforms has focused primarily on their impact on growth and productivity. Yet an often-invoked rationale for structural reforms is their impact on external adjustment. This paper finds little evidence that structural reforms improve the current account in the short run, but they can increase the responsiveness and resilience of the economy to external shocks. In particular, elasticities of exports with respect to the real effective exchange rate increase with some structural indicators, suggesting that structural reforms facilitate the reallocation of resources to the tradable sector in response to a negative external shock. The paper concludes that structural reforms, while not having an immediate positive impact on the current account balance, can be an important complement to traditional macroeconomic adjustment. |
| Keywords: | Current account;Exports;structural reforms, REER, real exchange rate, Country and Industry Studies of Trade, Trade and Labor Market Interactions, Open Economy Macroeconomics, Public Policy |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/182&r=opm |
| By: | Matteo Cacciatore; Romain Duval; Giuseppe Fiori; Fabio Ghironi |
| Abstract: | This paper studies the impact of product and labor market reforms when the economy faces major slack and a binding constraint on monetary policy easing---such as the zero lower bound. To this end, we build a two-country model with endogenous producer entry, labor market frictions, and nominal rigidities. We find that while the effect of market reforms depends on the cyclical conditions under which they are implemented, the zero lower bound itself does not appear to matter. In fact, when carried out in a recession, the impact of reforms is typically stronger when the zero lower bound is binding. The reason is that reforms are inflationary in our structural model (or they have no noticeable deflationary effects). Thus, contrary to the implications of reduced-form modeling of product and labor market reforms as exogenous reductions in price and wage markups, our analysis shows that there is no simple across-the-board relationship between market reforms and the behavior of real marginal costs. This significantly alters the consequences of the zero (or any effective) lower bound on policy rates. |
| JEL: | E24 E32 E52 F41 J64 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23960&r=opm |
| By: | Luigi Bocola; Guido Lorenzoni |
| Abstract: | We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers' behavior can generate multiple equilibria, with the bad equilibrium characterized by financial dollarization and the possibility of bank runs. A domestic lender of last resort can eliminate the bad equilibrium, but interventions need to be fiscally credible. Holding foreign currency reserves hedges the fiscal position of the government and enhances its credibility, thus improving financial stability. |
| JEL: | E44 F34 F41 G11 G15 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23984&r=opm |
| By: | Albert Queralto; Patrick Donnelly Moran |
| Abstract: | To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests significant TFP losses due to the ZLB. |
| Keywords: | Endogenous Technology ; Business Cycles ; Monetary Policy |
| JEL: | E32 F41 F44 G15 |
| Date: | 2017–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1217&r=opm |
| By: | Eugenio M Cerutti; Stijn Claessens; Andrew K. Rose |
| Abstract: | This study quantifies the importance of a Global Financial Cycle (GFCy) for capital flows. We use capital flow data dis-aggregated by direction and type between 1990Q1 and 2015Q5 for 85 countries, and conventional techniques, models and metrics. Since the GFCy is an unobservable concept, we use two methods to represent it: directly observable variables in center economies often linked to it, such as the VIX; and indirect manifestations, proxied by common dynamic factors extracted from actual capital flows. Our evidence seems mostly inconsistent with a significant and conspicuous GFCy; both methods combined rarely explain more than a quarter of the variation in capital flows. Succinctly, most variation in capital flows does not seem to be the result of common shocks nor stem from observables in a central country like the United States. |
| Date: | 2017–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/193&r=opm |
| By: | Stijn Claessens; M. Ayhan Kose |
| Abstract: | This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? And third, what are the main challenges to the theoretical and empirical findings? The survey addresses these questions in the context of four major asset price categories: equity prices, house prices, exchange rates and interest rates, with a particular focus on their international dimensions. It also puts into perspective the evolution of the literature on the determinants of asset prices and their linkages with macroeconomic outcomes, and discusses possible future research directions. |
| Keywords: | Equity prices, exchange rates, house prices, interest rates, credit, output, consumption, investment, real-financial linkages, macro-financial linkages, imperfections, frictions. |
| JEL: | D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-76&r=opm |
| By: | Mai Chi Dao; Camelia Minoiu; Jonathan David Ostry |
| Abstract: | We examine the relationship between real exchange rate depreciations and indicators of firm performance using data for a sample of more than 30,000 firms from 66 (advanced and emerging market) countries over the 2000-2011 period. We show that depreciations boost profits, investment, and sales of firms that are more financially-constrained and have higher labor shares. These findings are consistent with the view that depreciations boost internal financing opportunities by reducing real wages, thereby spurring investment. We show that these effects on firm performance are enduring, including in the market valuation of firms. |
| Date: | 2017–08–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/183&r=opm |
| By: | Margarida Duarte; Diego Restuccia |
| Abstract: | The relative price of services rises with development. A standard interpretation of this fact is that productivity differences across countries are larger in manufacturing than in services. The service sector comprises heterogeneous categories. We document that many disaggregated service categories—such as transportation, communication, and finance—feature a negative income elasticity of relative prices, whereas the relative price of aggregate services is mostly driven by large expenditure categories in housing, health, and education that feature a positive income elasticity of relative prices. We also document a substantial reallocation of expenditures in services from categories with positive income elasticities (traditional services) to categories with negative elasticities (non-traditional services) as income raises. Using an otherwise standard multi-sector development accounting framework extended to include an input-output structure, we find that the cross-country income elasticity of sectoral productivity is large in non-traditional services (1.14), smaller in manufacturing (1.06) and much smaller in traditional services (0.67). We also find that heterogeneity in services has a substantial impact on aggregate productivity and that the input-output structure is important in this assessment. |
| JEL: | O1 O4 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23979&r=opm |