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on Open Economy Macroeconomics |
| By: | Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina |
| Abstract: | A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations "pass through" to import and consumer prices. A standard open-economy model shows that the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. We build on this to develop a structural Vector Autoregression (SVAR) framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our ability to estimate how pass-through can change over short periods of time. For example, it can explain why sterling's post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling's 2013-15 appreciation was more muted. We also apply this framework to forecast the extent of pass-through from sterling's sharp depreciation corresponding to the UK's vote to leave the European Union. |
| Keywords: | consumer prices; exchange rate pass-through; import prices; inflation; vector autoregressions |
| JEL: | E31 F3 F41 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13037&r=opm |
| By: | Nelson Camanho (Catholic University of Portugal and London School of Economics & Political Science); Harald Hau (University of Geneva, Swiss Finance Institute; Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute)); Hélène Rey (London Business School, Centre for Economic Policy Research (CEPR), and National Bureau of Economic Research (NBER)) |
| Abstract: | We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets. |
| Keywords: | International equity funds, portfolio rebalancing, valuation effects, exchange rates |
| JEL: | G23 G15 G11 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1803&r=opm |
| By: | Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills |
| Abstract: | This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for U.S. policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large. |
| Keywords: | monetary policy, international spillovers, cross-border transmission, global bank, global financial cycle |
| JEL: | E52 F30 F40 G15 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7155&r=opm |
| By: | Raghavan, Mala (Tasmanian School of Business & Economics, University of Tasmania); Athanasopoulos, George (Monash University) |
| Abstract: | Using a parsimonious structural vector autoregressive moving average (SVARMA) model, we analyse the transmission of foreign and domestic shocks to a small open emerging economy under di erent policy regimes. Narrower con dence bands around the SVARMA responses compared to the SVAR responses, advocate the suitability of this framework for analysing the propagation of economic shocks over time. Malaysia is an interesting small open economy that has experienced an ongoing process of economic transition and development. The Malaysian government imposed exchange rate and capital control measures following the 1997 Asian nancial crisis. Historical and variance decompositions highlight Malaysia's high exposure to foreign shocks. The effects of these shocks change over time under di erent policy regimes. During the pegged exchange rate period, Malaysian monetary policymakers experienced some breathing space to focus on maintaining price and output stability. In the post-pegged period, Malaysia's exposure to foreign shocks increased and in recent times are largely driven by world commodity price and global activity shocks. |
| Keywords: | SVARMA models, Open Economy Macroeconomics, ASEAN, Shock transmissions |
| JEL: | C32 F41 E52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:27231&r=opm |
| By: | Habimana, Olivier |
| Abstract: | This thesis consists of three independent articles preceded by an introductory chapter. The first two articles focus on exchange rate dynamics in emerging market and developing economies, taking into account nonlinearities and asymmetries which are relevant for these countries and are potentially due to (i) transaction costs and other market frictions, and (ii) official intervention in the foreign exchange market. The third article is devoted to the analysis of the effects of monetary policy at different time horizons. The first article evaluates the purchasing power parity (PPP) theory in a panel of Sub-Saharan African countries. Unit root tests that are based on exponential smooth transition autoregressive (ESTAR) models are applied to account for nonlinearities and asymmetries in real exchange rate adjustment towards its equilibrium (mean) value. The results indicate empirical support for the PPP theory. The second article examines the relationship between current account adjustment and exchange rate flexibility in a panel of emerging market and developing economies. The purpose of this article is to (i) obtain a measure of exchange rate flexibility that considers autoregressive conditional heteroscedasticity and possible asymmetric responses of the exchange rate to shocks, and (ii) apply suitable dynamic panel data estimators to investigate this relationship. The results indicate that more flexible exchange rates are associated with faster current account adjustment. By means of wavelets the third article investigates the liquidity effect and the long-run neutrality of money at detailed timescales using time series data for Sweden and the US. The results indicate a significant liquidity effect at horizons of one to four years, but there is no evidence of monetary neutrality. |
| Keywords: | asymmetry, multiscale, time series, wavelets |
| JEL: | C15 C22 C23 E52 E6 F41 G1 |
| Date: | 2018–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87823&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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7123&r=opm |
| By: | Mariem Brahim (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Nader Nefzi (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Hamed Sambo (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The aim of this paper is to examine the effect of remittances on real effective exchange rate in MENA countries using an autoregressive distributive lag (ARDL) model and three estimators, namely the Pooled Mean Group estimator, the Mean Group estimator and the dynamics common correlated effects estimator. We use data from 9 countries of MENA region for the 1980-2015 period. On the long-run, we find that migrants' remittances towards the whole MENA countries negatively and significantly affect the real effective exchange rate. Indeed, the increase in remittances leads to a depreciation of the real exchange rate, meaning that remittances do not deteriorate the price competitiveness of the recipient countries in the long-run. Therefore, remittances do not cause the Dutch disease's risk in MENA countries. |
| Keywords: | Migration, Remittances, Real effective exchange rate, Dutch Disease,Monetary policy, MENA, ARDL |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01583564&r=opm |
| By: | Marcos Chamon; Julian Schumacher; Christoph Trebesch |
| Abstract: | Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law. |
| Keywords: | sovereign debt, creditor rights, seniority, law and finance |
| JEL: | F34 G12 K22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7137&r=opm |
| By: | Chamon, Marcos; Schumacher, Julian; Trebesch, Christoph |
| Abstract: | Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law. |
| Keywords: | Sovereign Debt,Creditor Rights,Seniority,Law and Finance |
| JEL: | F34 G12 K22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2109&r=opm |
| By: | Delis, Manthos; Politsidis, Panagiotis; Sarno, Lucio |
| Abstract: | Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads by approximately 20 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately USD 2.55 million for loans of average size and duration. We show that our finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets. Borrowers can lower the extra cost by forming strong lending relationships with their banks. |
| Keywords: | Global syndicated loans; Foreign currency lending; Exchange rate risk; Bank market power; Relationship lending |
| JEL: | F31 F33 F34 G21 |
| Date: | 2018–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88197&r=opm |
| By: | Kolasa, Marcin; Wesołowski, Grzegorz |
| Abstract: | This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets and an increase in international comovement of term premia. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. JEL Classification: E44, E52, F41 |
| Keywords: | bond market segmentation, international spillovers, quantitative easing, term premia |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182172&r=opm |
| By: | Stefan Avdjiev; Galina Hale |
| Abstract: | There is no consensus in the empirical literature on the direction in which U.S. monetary policy affects cross-border bank lending. We find robust evidence that the impact of the U.S. federal funds rate on cross-border bank lending in a given period depends on the prevailing international capital flows regime and on the level of the two main components of the federal funds rate: macroeconomic fundamentals and the monetary policy stance. During episodes in which bank lending from advanced to emerging economies is booming, the relationship between the federal funds rate and cross-border bank lending is positive and mostly driven by the macroeconomic fundamentals component, which is consistent with a search-for-yield behavior on the part of internationally-active banks. In contrast, during episodes of stagnant growth in bank lending from advanced to emerging economies, the relationship between the federal funds rate and bank lending is negative, mainly due to the monetary policy stance component of the federal funds rate. The latter set of results is most pronounced for lending to emerging markets, which is consistent with the international bank-lending channel and flight-to-quality behavior of internationally-active banks. |
| Keywords: | monetary policy spillovers, capital flows, bank lending |
| JEL: | F21 F32 F34 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:730&r=opm |
| By: | Jiranyakul, Komain |
| Abstract: | This paper explores the degree of exchange rate pass-through to domestic prices in Thailand using quarterly data from 2000Q1 to 2017Q4. Johansen cointegration tests are employed in the analysis. The degree of exchange rate pass-through is found to be partial and modest. The stable pass-through effect in the long-run is found for import price index. The findings give some implications for risk perception by firms and investors regarding the future inflationary environment of the country. |
| Keywords: | Exchange rate, domestic prices, cointegration |
| JEL: | C22 E31 F31 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87492&r=opm |
| By: | Isabel Cairo; Jae W. Sim |
| Abstract: | We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous reduction in inflation volatility and mean unemployment rate is feasible when an asymmetric policy rule is adopted. |
| Keywords: | Monetary policy ; Credit ; Financial crises ; Income inequality |
| JEL: | E32 E44 E52 G01 |
| Date: | 2018–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-48&r=opm |