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on Open Economy Macroeconomics |
| By: | Holm-Hadulla, Fédéric; Hubrich, Kirstin |
| Abstract: | We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the normal regime, oil price shocks trigger only limited and short-lived adjustments in these variables. In the adverse regime, by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterising the adverse regime. The systematic response of monetary policy works against such second-round effects in the adverse regime but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations – and inform deliberations on the adequate policy response – in real-time. JEL Classification: E31, E52, C32 |
| Keywords: | inflation, inflation expectations, oil prices, regime switching models, time-varying transition probabilities |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172119&r=opm |
| By: | Hamid Raza (Aalborg University, Denmark); Gylfi Zoega (University of Iceland; Birkbeck, University of London); Stephen Kinsella (Kemmy Business School, University of Limerick, Ireland) |
| Abstract: | We compare two small open economics, Iceland and Ireland, that experienced a capital inflow through their banking systems in the period preceding the 2008 financial crises but differ in their currency arrangements. Both countries have mostly recovered from their respective crises, but the differences in the way their economies adjusted are interesting. The evidence suggests that changes in the real exchange rate served as the adjusting mechanism for Iceland’s current account while in Ireland domestic demand compression served as the main adjustment mechanism. We also explore the adjustment to the crisis in three other Eurozone economies and find that they were similar to the one in Ireland. |
| Keywords: | sudden stop, real exchange rates, demand compression. |
| JEL: | F32 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1709&r=opm |
| By: | Ohdoi, Ryoji |
| Abstract: | This study analyzes how financial shocks in one country transmit to another country through international trade. To this end, it develops a dynamic general equilibrium model of two-country Ricardian trade with a continuum of goods. Financial frictions exist in each country and the two countries can be asymmetric in terms of the degree of frictions, which can be a novel source of comparative advantage. In the case of a permanent credit crunch, we can analytically show that such a shock reduces the long-run investment, GDP, wage income, and aggregate income of heterogeneous entrepreneurs in both countries. We also numerically investigate the transitory responses to a temporal credit shock and show that such an internationally synchronized economic downturn is also observed during transition periods. |
| Keywords: | Financial Frictions, Dynamic Ricardian Trade with a Continuum of Goods, Heterogeneous Agents, Asymmetric Countries, Credit Crunch |
| JEL: | E22 E32 E44 F11 F44 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83286&r=opm |
| By: | Nieminen, Mika; Heimonen, Kari; Tohmo, Timo |
| Abstract: | This study provides novel evidence on the impact of labor market institutions on current account dynamics. Our results suggest that a high degree of coordination of wage bargaining has a positive effect on the current account balance over the long run. This result is not driven entirely by wage moderation induced by centralized wage setting, however. A high degree of coordination of wage bargaining is associated with a slower current account adjustment toward its long-run equilibrium. This result seems theoretically plausible; the aggregate shocks in the exporting sector are largely driven by idiosyncratic shocks and the presence of idiosyncratic shocks increases the importance of labor market flexibility. This analysis of the impact of labor market institutions on current account balances complements the existing empirical current account literature focused on macroeconomic and financial measures. |
| JEL: | F21 F32 F41 |
| Date: | 2017–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2017_020&r=opm |
| By: | Matthieu Bussiere (Banque de France); Aikaterini Karadimitropoulou (University of East Anglia); Miguel A. Leon-Ledesma (University of Kent) |
| Abstract: | We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to understand the role of the real exchange rate for current account fluctuations. |
| Keywords: | current account, real exchange rate, two-good intertemporal model, SVAR |
| JEL: | F32 F41 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:uea:ueaeco:2017_06&r=opm |