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on Open Economy Macroeconomics |
| By: | Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University) |
| Abstract: | When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation‐targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand‐in‐hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics. |
| Keywords: | Currency appreciation; Capital flows; Global games |
| JEL: | C7 E5 F4 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/425hdq96dn97t84knejpafl2p7&r=opm |
| By: | Constantino Hevia; Luis Serven |
| Abstract: | This paper examines the extent of risk sharing for a group of 50 industrial and developing countries. The analysis is based on a model of partial consumption insurance whose parameters have the natural interpretation of coefficients of partial risk sharing even when the null hypothesis of perfect risk sharing is rejected. Results show that rich countries exhibit higher degrees of risk sharing than developing countries, and that the gap has widened over time. Other things equal, the degree of risk sharing is higher in smaller, more financially-open economies and in those possessing flexible exchange rate regimes. |
| Keywords: | Incomplete risk sharing, Financial globalization |
| JEL: | E21 F36 F41 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpecon:2018_01&r=opm |
| By: | Chen, Chaoyi; Polemis, Michael; Stengos, Thanasis |
| Abstract: | This paper contributes to the literature since it tries to link the Exchange Rate Pass-Through (ERPT) with the “rockets and feathers” hypothesis using a panel of EU-28 countries. Allowing for the existence of an endogenous threshold variable our empirical findings indicate that the threshold model is better suited to this analysis than the baseline linear adjustment model. This is the case since the latter restricts the threshold to be centered around zero and the dynamic response to cumulative shocks cannot be properly identified. The empirical findings reveal that the threshold variable expressed by the trade-weighted dollar exchange rate index is statistically significant only in the sample above the threshold (high regime). This means that for the net EU exporting countries, fluctuations in the real effective exchange rate of the US against its major EU trading partners does affect the level of pre-tax retail gasoline prices with the relevant elasticity exceeding unity (complete ERPT). Moreover, all the statistical tests reject the null hypothesis that there is no significant threshold and thus an asymmetric adjustment gasoline mechanism prevails. |
| Keywords: | Asymmetric gasoline adjustment; ERPT; Threshold analysis; Εxchange rate; Non-linear effects |
| JEL: | C14 C23 C24 F41 |
| Date: | 2018–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89671&r=opm |
| By: | Erica Perego |
| Abstract: | This paper studies the behavior of euro area asset market co-movements during the period 2010-2014, through the lens of a DSGE model. The economy is a two-country world consisting of a core and a periphery and featuring an international banking sector, international equity markets, home bias in sovereign bond holdings, and sovereign default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model accounts successfully for the divergence in core-periphery correlations between stock and sovereign bond returns. The simulation results indicate that the sovereign risk shock explains 50% of the increase in sovereign and loandeposit spreads, and 8% of the decrease in global output during the sovereign debt crisis. |
| Keywords: | Currency Union;International Financial Markets;Sovereign Risk;General Equilibrium |
| JEL: | F41 F44 G15 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2018-18&r=opm |
| By: | Fischer, Andreas M. (Swiss National Bank); Groeger, Henrike (European University Institute); Saure, Philip (Johannes Gutenberg University); Yesin, Pinar (Swiss National Bank) |
| Abstract: | This paper develops a formal strategy to calculate current accounts with retained earnings (RE) on equity investment and analyzes their adjustment during the global financial crisis. RE are the part of companies' profits which are reinvested and not distributed to shareholders as dividends. International statistical standards treat RE on foreign direct investment and RE on portfolio investment differently: while the former enter the current and financial account, the latter do not. We show that this differential treatment strongly affects current accounts of several advanced economies, frequently referred to as financial centers, with large positions in equity (portfolio) investment. Our empirical analysis finds that the differential treatment of RE alters the interpretation of current account adjustment for the global financial crisis. |
| Keywords: | Current account adjustment; financial centers; retained earnings; equity investment |
| JEL: | F32 F47 G11 |
| Date: | 2018–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:345&r=opm |
| By: | Corsetti, Giancarlo; Erce, Aitor; Uy, Timothy |
| Abstract: | We study theoretically and quantitatively how official lending regimes affect a government's decision to raise saving as opposed to defaulting, and its implication for sovereign bond pricing by investors. We reconsider debt sustainability in the face of both output and rollover risk under two types of institutional bailouts: one based on long-maturity, low-spread loans similar to the ones offered by the euro area official lenders; the other, on shorter maturity and high-spread loans, close to the International Monetary Fund standards. We show that official lending regimes raise the stock of safe debt and facilitate consumption smoothing through debt reduction. However, to the extent that bailouts translates into higher future debt stocks and countercyclical deficits in persistent recessions, they also have countervailing effects on sustainability. As a result, the effect of official loans is nonlinear in their size. As the threshold for safe debt rises, the maximum debt level the country finds it optimal to sustain when markets price rollover risk falls. This result unveils a fundamental trade-off in the provision of official loans, in turn rooted in a basic form of moral hazard. Quantitatively, the model is able to replicate Portuguese debt and spread dynamics in the years of the bailout after 2011. We show that, depending on the composition of debt by maturity and official lending, sustainable debt levels can vary between 50% of GDP and 180% of GDP depending on the state of the economy and the conditions for market access. Longer maturities have a stronger effect on sustainability than lower spreads. |
| Keywords: | Bailouts; Debt maturities; default; Rollover Risk; Sovereign debt; Spread |
| JEL: | F33 F34 H12 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13292&r=opm |
| By: | Ricardo Sabbadini |
| Abstract: | A decline in international risk-free interest rates decreases emerging markets (EM) sovereign spreads. I show that a quantitative model of sovereign debt and default exhibits this pattern if foreign lenders are loss-averse and have reference dependence. This happens because investors search for yield in risky EM bonds when the risk-free rate is lower than their return of reference |
| Keywords: | sovereign spread; search for yield; loss aversion; low interest rate |
| JEL: | E43 F34 F41 |
| Date: | 2018–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2018wpecon16&r=opm |
| By: | Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas) |
| Abstract: | In this paper, I explore the changes in international business cycles with quarterly data for the eight largest advanced economies (U.S., U.K., Germany, France, Italy, Spain, Japan, and Canada) since the 1960s. Using a time-varying parameter model with stochastic volatility for real GDP growth and inflation allows their dynamics to change over time, approximating nonlinearities in the data that otherwise would not be adequately accounted for with linear models (Granger et al. (1991), Granger (2008)). With that empirical model, I document a period of declining macro volatility since the 1980s, followed by increasing (and diverging) inflation volatility since the mid-1990s. I also find significant shifts in inflation persistence and cyclicality, as well as in macro synchronization and even forecastability. The 2008 global recession appears to have had an impact on some of this. I ground my empirical strategy on the reduced-form solution of the workhorse New Keynesian model and, motivated by theory, explore the relationship between greater trade openness (globalization) and the reported shifts in international business cycles. I show that globalization has sizeable (yet nonlinear) effects in the data consistent with the implications of the model—yet globalization’s contribution is not a foregone conclusion, depending crucially on more than the degree of openness of the international economy. |
| Keywords: | Great Moderation; Globalization; International Business Cycles; Stochastic Volatility; Time-Varying Parameters |
| JEL: | E31 E32 F41 F44 |
| Date: | 2018–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:348&r=opm |
| By: | Ricardo Sabbadini |
| Abstract: | Despite the cost imposed by the interest rate spread between sovereign debt and international reserves, emerging countries’ governments maintain stocks of both. I investigate the optimality of this joint accumulation of assets and liabilities using a quantitative model of sovereign debt, in which: i) international reserves only function to smooth consumption, before or after a default; ii) the sovereign’s decision to repudiate debt determine the spread; iii) lenders are risk-averse; and iv) default is partial. Simulated statistics from the benchmark model match their observed counterparts for average debt and spread, consumption volatility, and the main correlations among the relevant variables. Due to the presence of partial default and risk-averse lenders, the model also produces a mean reserve level of 7.7% of GDP, indicating that the optimal policy is to hold positive amounts of reserves. |
| Keywords: | international reserves; sovereign debt; sovereign default; partial default; interest rate spread |
| JEL: | E43 F31 F34 F41 |
| Date: | 2018–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2018wpecon14&r=opm |
| By: | Karagiannides, Gabriel |
| Abstract: | A crucial theme in macroeconomic dynamics concerns the issue of determinacy, that is, the question of uniqueness or multiplicity of admissible dynamic trajectories. Unlike previous studies which economy addressed this question in a closed, we explore the determinacy dynamics in a small open economy. The structure of the model set forth, is such that it leads to a higher degree characteristic equation which cannot be handled analytically. By using a specific algorithm developed, we solve it and show that a form of a Taylor rule implies, for the parameter space examined, determinate equilibrium dynamics. In line with previous findings on determinacy, the case for a form of flexible Price Level Targeting (PLT), does not only hold in a closed economy but, also, extends with some modification, to a small open economy as well. |
| Keywords: | Taylor Rule, Open Economy Dynamics, Flexible PLT, Determinacy |
| JEL: | C54 E52 |
| Date: | 2018–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89268&r=opm |
| By: | Brede, Maren |
| Abstract: | This paper explores the Balassa-Samuelson effect in a New-Keynesian DSGE model of a monetary union with traded and non-traded goods. Credible sets for theoretical impulse response functions show that a model with perfect intersectoral labour mobility is unable to reproduce an appreciation of the real exchange rate caused by higher productivity in the traded sector. Allowing for imperfect intersectoral labour mobility resolves this obstacle and delivers testable restrictions for model parameters governing the labour market specification in a Bayesian estimation context. |
| Keywords: | Real exchange rate,Balassa-Samuelson,prior predictive analysis |
| JEL: | F41 F47 C51 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc18:181539&r=opm |