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on Open Economy Macroeconomics |
| By: | Charles I. Plosser |
| Abstract: | In this short paper, I review previous efforts at international coordination among central banks. In particular, I highlight the ultimate failure of both the gold standard and the Bretton Woods regimes. In both cases, the desire for a fixed rate regime forcing each country to make domestic monetary and fiscal policies subservient to pressures from the external balance. These regimes were not incentive compatible with sovereign nations' desire to pursue independent monetary and fiscal policy. Thus, future efforts at coordination that seek to constrain or limit central bank's domestic goals will most likely fail as well. I agree with John Taylor that the best results are likely to arise in more rule-like regimes with flexible exchange rates and capital mobility where the rules are more incentive compatible with domestic desires. |
| Keywords: | Â |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:18101&r=opm |
| By: | Alexandra Born; Zeno Enders |
| Abstract: | The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channel in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German data, the model predicts the trade channel to be twice as important for the transmission of the crisis than the financial channel. In the UK, the latter dominates due to higher foreign-asset holdings, which, at the same time, serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter enforcement of bank capital requirements would have deepened the initial slump while simultaneously speeding up the recovery. The effects of higher capital requirements depend on the way banks’ balance sheets adjust to this intervention. |
| Keywords: | financial crisis, international transmission, international business cycles, global banks |
| JEL: | F44 F41 E32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6912&r=opm |
| By: | Alcidi, Cinzia; D’Imperio, Paolo; Thirion, Gilles |
| Abstract: | This paper compares the capacity to smooth the impact of asymmetric shocks in the US and in the euro area (EA) and examines the various mechanisms through which the shock absorption occurs. It first notes that comparable data for the US and the EA are not readily available, and that in the US, state accounting is such that what the literature commonly calls international risk-sharing in reality embeds inter-temporal consumption-smoothing through retained corporate earnings. With this in mind, we build euro area aggregates suitable for comparison. Our findings confirm that international capital markets in the US are a more powerful tool for risk-sharing than in the EA, but less so than previously reported. The better performance of the US is explained by very poor shock-absorption dynamics in the peripheral euro area countries, especially after 2010, as well as by a higher persistence of shocks in the euro area relative to the US. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:12514&r=opm |
| By: | Michael D. Bordo |
| Abstract: | The recent rise of populist anti-globalization political movements has led to concerns that the current wave of globalization that goes back to the 1870s may end in turmoil just like the first wave that ended after World War I. It is too soon to tell. The decline and then levelling off of trade and capital flows in recent years reflects the drastic decline in global real income during the Great Recession. Other factors at work include the slowdown in the growth rate of China and the reversal of the extended international supply chains developed in the 1990s, as well as increased financial regulation across the world after the crisis. This suggests either a pause in the pace of integration or more likely a slowing down, rather than a reversal. |
| Keywords: | Â |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:17103&r=opm |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | In Caballero and Simsek (2018), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situation of Emerging Markets (EM) exchanging flows with Developed Markets (DM) that feature lower returns but less frequent crises. Relatively high DM returns help to mitigate EM crises, by reducing fickle inflows, and by providing greater liquidity. The situation dramatically changes as the DM returns fall, as this increases the fickle inflows driven by reach for yield and exacerbates EM crises. |
| JEL: | F3 F34 F4 G15 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24400&r=opm |
| By: | Dramane Coulibaly; Blaise Gnimassoun; Valérie Mignon |
| Abstract: | Following the dynamics of globalization, international migration has increased dramatically since the 1990s. Given that these migrations may obscure the natural demographic structure of nations, they are likely to explain a signifcant part of global imbalances. This paper tackles this issue by investigating the role played by international migration in the dynamics of global imbalances. To this end, we rely on an overlapping generations model to derive the theoretical relationship between international migration and current account position. Through a series of robust estimates, we empirically investigate this relationship by relying on a panel of 157 developed and developing countries over the period 1990-2014. Our results point to substantial effects of international migration. Specifcally, we show that an increase in migration improves national savings and the current account balance in the destination country, while it has opposite impacts in the origin country. These effects are particularly pronounced in developing economies, and attenuated by migrants' remittances. |
| Keywords: | International Migration;Current Account;Global Imbalances;Remittances |
| JEL: | F22 F32 O55 C33 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2018-02&r=opm |
| By: | Marlene Amstad (The Chinese University of Hong Kong, Shenzhen (E-mail: marleneamstad@cuhk.edu.cn)); Frank Packer (Bank for International Settlements, Hong Kong (E-mail: frank.packer@bis.org)); Jimmy Shek (Bank for International Settlements, Hong Kong (E-mail: jimmy.shek@bis.org)) |
| Abstract: | Historically, sovereign debt in local currency has been considered safer than debt in foreign currency. The literature offers scant theoretical or empirical guidance as to why such a gap has existed or why it appears to have slowly and steadily diminished for all regions over the past two decades, as expressed in the credit ratings widely used by global investors and regulators to assess credit risk. We suggest and empirically test five hypotheses. We find the assessed differences between local and foreign currency credit risk to not be driven by changes in inflation. The banking sector fs vulnerability to sovereign debt problems is a significant determinant of the gap, but does not account for the declining spread over time. Instead, the surge in global reserves, and to lesser extent the declining dependence on foreign currency borrowing overseas (decline of original sin), as well as lower global volatility, appear to have diminished the gap. In case of a trend reversal of these variables, there could be a widening of the gap going forward. |
| Keywords: | Sovereign risk, local currency debt, foreign currency debt, credit ratings |
| JEL: | F31 F33 F34 F41 H63 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:18-e-01&r=opm |
| By: | Schumacher, Julian; Trebesch, Christoph; Enderlein, Henrik |
| Abstract: | For centuries, defaulting governments were immune from legal action by foreign creditors. This paper shows that this is no longer the case. Building a dataset covering four decades, we find that creditor lawsuits have become an increasingly common feature of sovereign debt markets. The legal developments have strengthened the hands of creditors and raised the cost of default for debtors. We show that legal disputes in the US and the UK disrupt government access to international capital markets, as foreign courts can impose a financial embargo on sovereigns. The findings are consistent with theoretical models with creditor sanctions and suggest that sovereign debt is becoming more enforceable. We discuss how the threat of litigation affects debt management, government willingness to pay, and the resolution of debt crises. JEL Classification: F34, G15, H63, K22 |
| Keywords: | debt restructuring regime, enforcement, government financing, sovereign default |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182135&r=opm |
| By: | Marlene Amstad; Frank Packer; Jimmy Shek |
| Abstract: | Historically, sovereign debt in local currency has been considered safer than debt in foreign currency. Yet the literature offers scant theoretical or empirical guidance as to why such a gap exists, or why it appears to have slowly and steadily diminished for all regions over the past two decades, as expressed in the ratings widely used by global investors and regulators to assess credit risk. We suggest and empirically test five hypotheses. We find that differences in inflation do not explain the assessed gaps between local and foreign currency credit risk. The banking sector's vulnerability to sovereign debt problems is a significant determinant of the spread, but does not account for its decline over time. Instead, the surge in global reserves, and to lesser extent the reduced reliance on overseas foreign currency borrowing (ie the decline of original sin), as well as lower global volatility, appear to have lessened the gap. But if these variables were to go into reverse, the gap could again widen. |
| Keywords: | sovereign risk, local currency debt, foreign currency debt, credit ratings |
| JEL: | F31 F33 F34 F41 H63 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:709&r=opm |
| By: | Ikeda, Daisuke (Bank of England); Phan, Toan (Federal Reserve Bank of Richmond) |
| Abstract: | We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of bubbles in the North. Bubbles in the North in turn facilitate South-to-North capital flows. The model can simultaneously explain several stylized features of recent bubble episodes. |
| Keywords: | Rational bubbles; global imbalances; financial frictions; credit boom |
| JEL: | F32 F41 F44 |
| Date: | 2018–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:18-07&r=opm |
| By: | Marta Aloi; Huw Dixon; Anthony Savagar |
| Abstract: | We analyze labor responses to technology shocks when firm entry is sluggish due to endogenous sunk costs. We provide closed-form solutions for transition dynamics that show, when firm entry is slow to respond, labor will increase (decrease) relative to its long-run response if returns to labor input at the firm level are increasing (decreasing). Under stricter regulation (slower business churn), such short-run deviations of labor persist for longer. There is also potential for short-run productivity effects to differ from the long run. |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1804&r=opm |
| By: | Michael Fidora (European Central Bank); Claire Giordano (Banca d’Italia); Martin Schmitz (European Central Bank) |
| Abstract: | Building upon a behavioural equilibrium exchange rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals have been affected by the adoption of a single currency. A comparison of real misalignments across different country groupings (euro area, non-euro area, advanced and emerging economies), shows they are smaller in the euro area than in its main trading partners. However, in the euro area real disequilibria are also more persistent, although after the global financial crisis the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities. |
| Keywords: | Real effective exchange rate, equilibrium exchange rate, monetary union, regulation. |
| JEL: | E24 E30 F00 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1162_18&r=opm |
| By: | Enrique Alberola-Ila; Ángel Estrada; Francesca Viani |
| Abstract: | After the recent crisis, a reduction was observed in global current account (flow imbalances). Still, global disequilibria as measured in terms of countries' net foreign assets (stock imbalances), kept increasing. This paper studies whether stock imbalances have a stabilizing or destabilizing impact on countries' accumulation of external wealth and why. Our results show that in debtor economies the existing stock of net debt is stabilising as it helps to reduce trade imbalances, limit current account deficits and halt future debt accumulation. In creditor countries, instead, the positive stock of net foreign assets contributes - everything else equal - to increase future current account surpluses, as trade balances do not adjust, potentially leading to destabilizing dynamics in wealth accumulation. The asymmetry may have relevant implications for global trade and growth. |
| Keywords: | global imbalances, current account,international investment position,external debt |
| JEL: | F32 F34 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:707&r=opm |