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on Open Economy Macroeconomics |
| By: | Andres Blanco; Javier Cravino |
| Abstract: | We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for five countries. Relative reset prices account for almost the totality of the real exchange rate movements. This is at odds with the predictions of most workhorse sticky price models used to generate volatile and persistent real exchange rates. In these models relative reset prices are sluggish because relative wages are either sluggish or mean revert quickly. We show that models where movements in relative wages are persistent and track the nominal exchange rate do replicate the empirical properties of both the real exchange rate and of relative reset prices. |
| JEL: | F31 F41 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24655&r=opm |
| By: | Charles Engel; Jungjae Park |
| Abstract: | This study quantitatively investigates the currency composition of sovereign debt in the presence of two types of limited enforcement frictions arising from a government’s monetary and debt policy: strategic currency debasement and default on sovereign debt. Local currency debt obligations are state contingent because the real value can be changed by a government’s monetary policy, and are therefore a better consumption hedge against income shocks than foreign currency debt. However, this higher degree of state contingency for local currency debt provides policymakers with more temptation to deviate from disciplined monetary policy, thus restricting borrowing in local currency more than in foreign currency. The two financial frictions combine to generate an endogenous debt frontier for local and foreign currency debts. Our model predicts that a country with less disciplined monetary policy borrows mainly in foreign currency, as the country faces a tighter borrowing limit for local currency debt than for the foreign currency debt. Our model accounts for the surge in local currency borrowings by emerging economies in the recent decade and the “Mystery of Original Sin”. An important extension demonstrates that in the presence of an expectational Phillips curve, local currency debt improves the ability of monetary policymakers to commit. |
| JEL: | E52 F3 F41 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24671&r=opm |
| By: | Jordá, Óscar; Schularick, Moritz; Taylor, Alan M.; Ward, Felix |
| Abstract: | This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes. |
| Keywords: | asset prices; equity return premium; financial centers; financial cycles; policy spillovers |
| JEL: | E50 F33 F42 F44 G12 N10 N20 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12969&r=opm |
| By: | Mengus, Eric; Challe, Edouard; Lopez, Jose Ignacio |
| Abstract: | This paper analyzes, empirically and theoretically, the link between capital inflows and the quality of economic institutions. Starting with the example of Southern European countries (Spain, Portugal, Italy and Greece), we show that they experienced a significant decline in the quality of their institutions in the run-up to the euro currency, a period of cheap external funding and large capital inflows. We confirm this joint pattern of capital flows and institutional decline in a large panel of countries since the mid-1990s. We then develop an open-economy model of the "soft budget constraint" syndrome wherein persistently cheap funding from abroad (i) raises the prevalence of extractive projects and (ii) expands their support by the (benevolent) government ex post. While the government may in principle limit the prevalence of extractive projects ex ante, we show that the incentives to do so is limited when foreign borrowing is cheap. |
| Keywords: | Institutions; current account |
| JEL: | E02 F33 G15 |
| Date: | 2019–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1247&r=opm |
| By: | Broner, Fernando A; Clancy, Daragh; Erce, Aitor; Martín, Alberto |
| Abstract: | This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. Thus, these crowding-out effects are likely to be weaker when public debt is purchased by foreigners. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17 advanced economies from the 1980's to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for a large set of advanced economies. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950's and 1960's and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today. |
| Keywords: | Fiscal Multiplier; Foreign Holdings of Public Debt; Sovereign debt |
| JEL: | E62 F32 F34 F36 F41 G15 H63 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12960&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:1716&r=opm |
| By: | Engelbert Stockhammer (Kingston University); Collin Constantine; Severin Reissl |
| Abstract: | The paper proposes a post-Keynesian analysis of the Eurozone crisis and contrasts interpretations inspired by New Keynesian, New Classical, and Marxist theories. The origin of the crisis is the emergence of a debt-driven and an export-driven growth model, which resulted in a rapid increase in private debt ratios and current account imbalances. The reason the crisis escalated in southern Europe, but not in other parts of the world, lies in the unique dysfunctional economic policy regime of the Euro area. European fiscal rules and the Troika impose fiscal austerity on countries in crisis and the separation of fiscal and monetary spaces has made countries vulnerable to sovereign debt crises and forced them to comply. We analyse the role different paradigms attribute to current account imbalances, fiscal policy and monetary policy. Remarkably, opposing views on the relative importance of cost and demand developments in explaining current account imbalances can be found in both heterodox and orthodox economics. Regarding the assessment of fiscal and monetary policy there is a clearer polarisation, with heterodox analysis regarding austerity as unhelpful and large parts of orthodox economics endorsing it. We conclude that there is a weak mapping between post-Keynesian, New Classical, New Keynesian and Marxist theories and different economic policy strategies for the Euro area, which we label Keynesian New Deal, European Orthodoxy, Moderate Reform and Progressive Exit respectively. |
| Keywords: | Euro crisis, European economic policy, sovereign debt crisis, current account balance, fiscal policy, quantitative easing |
| JEL: | B00 E00 E50 E63 F53 G01 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:1617&r=opm |
| By: | Natalie Chen; Dennis Novy |
| Abstract: | How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to the effect of currency unions on international trade. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our framework, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union. Instead, countries need to take into account the distribution of their trade shares to assess the impact of trade costs. |
| Keywords: | currency unions, Euro, gravity, heterogeneity, trade costs, trade elasticity, translog |
| JEL: | F14 F15 F33 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1550&r=opm |
| By: | Matteo Maggiori; Brent Neiman; Jesse Schreger |
| Abstract: | We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all foreign debt securities denominated in their own currency. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold across countries with the exception of the US, which issues an international currency. The global willingness to hold US dollars means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar after the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit its status brings to the US. |
| JEL: | E4 F3 F5 G1 G2 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24673&r=opm |
| By: | Claudiu Tiberiu Albulescu (Politehnica University of Timisoara); Dominique Pépin (University of Poitiers); Stephen M. Miller (University of Nevada, Las Vegas) |
| Abstract: | This paper investigates and compares the effect of currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro on CEE money demand functions. In addition, we develop a model with microeconomic foundations, which identifies the difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to the money demand sensitivity to interest rate spreads between CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries. |
| Keywords: | Money demand; Open-economy model; Currency substitution; Cointegration; CEE countries |
| JEL: | E41 E52 F41 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2018-06&r=opm |
| By: | Guerrieri, Cinzia; Mendicino, Caterina |
| Abstract: | How sizable is the wealth effect on consumption in euro area countries? To address this question, we use newly available harmonized euro area wealth data and the methodology in Carroll et al. (2011b). We find that the marginal propensity to consume out of total wealth averaged across the largest euro area economies is around 3 cents per euro, with a marginal propensity to consume out of financial wealth significantly larger than of housing wealth. Country-group estimates document no significant differences between the largest economies and the rest of the sample. In contrast, remarkable differences emerge between periphery and core countries. JEL Classification: C22, E21, E32, E44 |
| Keywords: | consumption dynamics, financial assets, households wealth, wealth effects |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182157&r=opm |
| By: | Michael T. Kiley |
| Abstract: | Research has suggested that a rapid pace of nonfinancial borrowing reliably precedes financial crises, placing the pace of debt growth at the center of frameworks for the deployment of macroprudential policies. I reconsider the role of asset-prices and current account deficits as leading indicators of financial crises. Run-ups in equity and house prices and a widening of the current account deficit have substantially larger (and more statistically-significant) effects than debt growth on the probability of a financial crisis in standard crisis-prediction models. The analysis highlights the value of graphs of predicted crisis probabilities in an assessment of predictors. |
| Keywords: | Current account ; Debt ; Equity prices ; Financial crisis ; House prices |
| JEL: | G01 E44 F32 |
| Date: | 2018–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-38&r=opm |