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on Open Economy Macroeconomics |
| By: | Obstfeld, Maurice |
| Abstract: | As international capital markets expanded in breadth and depth after the middle 1990s, global current account imbalances also expanded markedly. Some have linked the origin of the subsequent Global Financial Crisis (GFC) to these global imbalances. This essay proposes answers to four questions about the recent history of global imbalances. Why did global imbalances expand after the mid-1990s? What circumstances and concomitant factors provide clues about the origins of the GFC? If one accepts that a mono-causal story about the GFC based on global imbalances is inaccurate, how should one view the potential threats from excessive global imbalances today? And finally, what policy implications follow? |
| Keywords: | current account; global financial crisis (GFC); global imbalances; IMF External Sector Report |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13066&r=opm |
| By: | Germán Gutiérrez; Thomas Philippon |
| Abstract: | Until the 1990's, US markets were more competitive than European markets. Today, European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry. We document this surprising outcome and propose an explanation using a model of political support. Politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces. Our comparative analysis of antitrust policy reveals strong support for this and other predictions of the model. European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did. Countries with ex-ante weak institutions benefit more from the delegation of antitrust enforcement to the EU level. Our model also explains why political and lobbying expenditures have increased much more in America than in Europe, and using data across industries and across countries, we show that these expenditures explain the relative rise of concentration and market power in the US. |
| JEL: | D02 D41 D42 D43 D72 E25 K21 L0 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24700&r=opm |
| By: | Ionut Cotoc (McMaster University); Alok Johri (McMaster University); Cesar Sosa-Padilla (Notre Dame) |
| Abstract: | We combine three international datasets containing information on the political leanings of the ruling government, sovereign debt yields, and key macroeconomic quantities. This yields new stylized facts regarding the influence of the political leanings of a country's government on their international borrowing costs as well as on fiscal policy. First, left wing governments, on average, pay 134 basis points more than right wing governments to borrow on international debt markets. Second, interest rates on left-wing government debt are 50 percent more volatile than their right-wing counterparts and 40 percent less negatively correlated with output. Third, government spending is very highly correlated with GDP with left governments showing a lower positive correlation and much less volatility than right wing governments. We proceed to build a sovereign default model in which elections determine which one of two politically heterogeneous policy makers will be in charge of the government. When the two policy makers differ in the marginal impact of their fiscal choices on their re-election probabilities, our model delivers the above-mentioned features of the data. In addition, in keeping with the data, right-wing governments display lower tax rates and government consumption to GDP shares than left-wing governments in our calibrated model. Left governments systematically default at higher income levels than right governments leading to political default events when the left replaces the right as well as higher average borrowing costs for the left government. The model implies that re-election probabilities are increasing in good times. These results are obtained without assuming any differences in the preferences of the two types of policy makers. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1125&r=opm |
| By: | Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova |
| 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. |
| JEL: | E31 E41 E52 F3 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24773&r=opm |
| By: | Romanos Priftis; Srecko Zimic |
| Abstract: | This paper finds that debt-financed government spending multipliers vary considerably depending on the location of the debt buyer. In a sample of 33 countries, we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared with when government purchases are financed by issuing debt to home investors (residents). A theoretical model (with flexible or sticky prices) shows that the location of the government creditor produces these differential responses to the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, both in the model and in the data. |
| Keywords: | Debt Management, Economic models, Fiscal Policy, International financial markets |
| JEL: | E2 E62 F41 H3 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-32&r=opm |
| By: | Markus Brunnermeier (Princeton University); Oleg Itskhoki (Princeton University); Pierre-Olivier Gourinchas (UC Berkeley) |
| Abstract: | What is the relationship between trade and current account openness and growth? Can a catching-up economy borrow like Argentina or Spain and grow like China? To address these questions, we develop a model of endogenous converge growth, which we study under various policy regimes regarding trade and capital account openness. In the model, entrepreneurs adopt heterogenous projects based on their profitability. Trade openness has two effects on the relative profitability of tradable projects. First, the foreign competition effect unambiguously discourages tradable innovation. Second, the relative market size effect may favor or discourage tradable innovation. We show that balanced trade ensures that the two effects exactly offset each other, while trade deficits unambiguously favor non-tradable innovation. The increase in domestic consumption associated with international borrowing results in a relative market size effect that reinforces the foreign competition effect to discourage tradable innovation, as well as the aggregate innovation rate and the pace of productivity convergence. We further show that net exports relative to domestic absorption is a sufficient statistic for the feedback effect from aggregate allocation into sectoral productivity growth, and we find empirical support for the predictions of the model in the panel of sectoral productivity growth rates in OECD countries. A sudden stop in capital flows during the transition phase results simultaneously in a recession due to a fall in local demand and a sharp rebound in tradable productivity growth, provided the labor market can adjust flexibly via a sharp decline in the wage rate. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:198&r=opm |
| By: | Òscar Jordà; Moritz Schularick; Alan M. Taylor; Felix Ward |
| 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. |
| JEL: | E50 F33 F42 F44 G12 N10 N20 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24677&r=opm |