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on Open Economy Macroeconomics |
| By: | Hamann, Franz (Banco de La Republica); Mendoza, Enrique G. (University of Pennsylvania); Restrepo-Echavarria, Paulina (Federal Reserve Bank of St. Louis) |
| Abstract: | In this paper we document the stylized facts about the relationship between international oil price swings, sovereign risk and macroeconomic performance of oil-exporting economies. We show that even though being a bigger oil producer decreases sovereign risk–because it increases a country’s ability to repay–having more oil reserves increases sovereign risk by making autarky more attractive. We develop a small open economy model of sovereign risk with incomplete international financial markets, in which optimal oil extraction and sovereign default interact. We use the model to understand the mechanisms behind the empirical facts, and show that it supports them. |
| Keywords: | Sovereign Risk; Oil Production; Oil Reserves; Oil Price Swings |
| JEL: | F34 Q32 |
| Date: | 2018–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-032&r=opm |
| By: | Dvorkin, Maximiliano (Federal Reserve Bank of St. Louis); Sanchez, Juan M. (Federal Reserve Bank of St. Louis); Sapriza, Horacio (Federal Reserve Board); Yurdagul, Emircan (Universidad Carlos III) |
| Abstract: | We show evidence that news about future productivity play an important role in the dynamics of country risk leading to a sovereign debt crisis. We show that a news shock has a significantly larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. We develop a quantitative model of news and sovereign debt default with endogenous maturity that can generate impulse responses very similar to the empirical estimates. The model also highlights that the effect of a news shock is stronger for an economy with shorter debt maturity. Finally, our analytic framework also suggests that as the precision of news increases, the economy may not increase its total indebtedness, but will be able to borrow at shorter maturities and pay lower spreads, especially during periods of high financial stress. |
| Keywords: | Crises; News; Default; Spreads; Maturity; Country Risk; Sovereign Debt |
| JEL: | F34 F41 G15 |
| Date: | 2018–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2018-033&r=opm |
| By: | Ly-Dai, Hung |
| Abstract: | We explain U-shape pattern of international capital inflows by one multi-country OLG economy and one cross-section data sample. The theory proves that capital inflows are decreasing on distance to frontier, which is measured by ratio of domestic productivity level over United States’ level. The evidences not only confirm the theory but also reveal that growth is decreasing on distance to frontier for club of convergence but increasing for club of unconvergence. Therefore, Neo-Classical growth model’s implication, that capital inflows are positively correlated to growth, applies for club of convergence. However, Allocation puzzle, that capital inflows are negatively correlated to growth, works for club of unconvergence. The turning point of U-shape pattern is the productivity growth rate at world technology frontier. |
| Keywords: | International Capital Flows, Productivity Growth, Relative Convergence |
| JEL: | F15 F36 F43 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90232&r=opm |
| By: | António Afonso; Philemon Kwame Opoku |
| Abstract: | This study re-examines the nexus between the fiscal balance and the current account balance for 18 OECD countries for the period 1995Q1 to 2018 Q1 using panel cointegration, and panel vector autoregressive (VAR) methods. Our results indicate that a strengthening in the fiscal balance by one percentage point of GDP leads to an improvement in the current account balance of about 0.1-0.3 percentage point of GDP. On the other hand, an increase in real government consumption generally leads to a deterioration in the current account balance. The impact of the real effective exchange rate is not statistically significant. The findings also confirm that there is a long-run relationship between the fiscal balance and the current account balance. |
| Keywords: | Fiscal imbalances, Current account, Twin-deficit, Panel analysis |
| JEL: | C32 C40 E62 H62 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0612018&r=opm |
| By: | Ken W. Clements (Business School, The University of Western Australia); Jiawei Si (Business School, The University of Western Australia); Long H. Vo (Business School, The University of Western Australia) |
| Abstract: | This paper investigates several basic characteristics of food and agricultural prices across commodities, countries and time. The first part of the paper uses consumer prices across commodities and countries from the International Comparisons Program and finds that food has a distinct tendency to be cheaper in rich countries as compared to poor ones. This possibly reflects the productivity bias effect of Balassa and Samuelson, or Engel’s law. Food prices are also less dispersed in rich countries. Cross-country and cross-commodity tests reject the law of one price (LOP) more often than not with, as might be expected with consumer prices. In the second part of the paper, data on agricultural producer prices from the Food and Agriculture Organisation are used to test if deviations from the LOP are stationary, using a panel approach. As about three-quarters of the 100+ products obey the law, there seems to be some support for the LOP in this context. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:17-04&r=opm |
| By: | Lieberknecht, Philipp; Vermeulen, Philip |
| Abstract: | We estimate the long- and short-run relationship between top income and wealth shares for France and the US since 1913. We find strong evidence for a long-run cointegration relationship governed by relative saving rates at the top. For both countries, we estimate a decline in the relative saving rates at the top – after 1968 in France and 1983 in the US, equivalent to a reduction of the long-run gap between wealth and income inequality compared to the period before. In the short-run, income inequality drives wealth inequality, while the converse link is weaker and slower. Using counterfactual simulations, we find that the recent rise in wealth inequality in the US is largely attributable to the contemporary increase in income inequality. Modest income concentration dynamics and a stronger decline in relative saving rates at the top than in the US contributed to a more subdued rise in wealth inequality in France. JEL Classification: D31, E21, E25, N32, N34 |
| Keywords: | cointegration, income inequality, top shares, VECM, wealth inequality |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182204&r=opm |
| By: | Duca, Ioana A.; Kenny, Geoff; Reuter, Andreas |
| Abstract: | This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding. JEL Classification: D12, D84, E21, E31, E52 |
| Keywords: | consumer inflation expectations, consumption, lower bound, micro data |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182196&r=opm |
| By: | Scheubel, Beatrice; Tafuro, Andrea; Vonessen, Benjamin |
| Abstract: | In the policy debate on the effectiveness of the Global Financial Safety Net, concerns have been raised that expectations of adverse effects of IMF programmes may deter countries from asking for an IMF programme when they need one, a form of ‘IMF stigma’. We explore the existence of IMF financial market stigma using monthly data by estimating how and to which extent adverse market reactions to a programme materialise and how past experience with adverse market reactions affects subsequent IMF programme participation. Our results, derived with event history techniques and propensity score matching, indicate no role for ‘IMF stigma’ stemming from the fear of adverse market movements. Instead, we find evidence of ‘IMF recidivism’ driven by adverse selection and IMF conditionality. JEL Classification: E02, F32, F33, F34 |
| Keywords: | Asian crisis, capital flows, Global Financial Safety Net, IMF conditionality, IMF recidivism, treasury bill rates |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182198&r=opm |
| By: | Wen Chen; Bart Los; Marcel P. Timmer |
| Abstract: | Recent studies document a decline in the share of labour and a simultaneous increase in the share of residual (‘factorless’) income in national GDP. We argue the need for study of factor incomes in cross-border production to complement country studies. We define a GVC production function that tracks the value added in each stage of production in any country-industry. We define a new residual as the difference between the value of the final good and the payments to all tangibles (capital and labour) in any stage. We focus on GVCs of manufactured goods and find the residual to be large. We interpret it as income for intangibles that are (mostly) not covered in current national accounts statistics. We document decreasing labour and increasing capital income shares over the period 2000-14. This is mainly due to increasing income for intangible assets, in particular in GVCs of durable goods. We provide evidence that suggests that the 2000s should be seen as an exceptional period in the global economy during which multinational firms benefitted from reduced labour costs through offshoring, while capitalising on existing firm-specific intangibles, such as brand names, at little marginal cost. |
| JEL: | E01 E22 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25242&r=opm |
| By: | Reynaud, Emmanuel. |
| Abstract: | This paper uses the United Nations Global Policy Model (GPM) to assess how increasing minimum wages might impact the South African economy by increasing the share of income going to workers (the ‘labour share’) – in contrast to the share that accrues to capital through profits and property income. We simulate the implementation of a national minimum wage through increasing labour compensation in a manner which sees real-wage growth ‘catching up’ to and then outstripping labour-productivity growth in the period 2015–2025; we refer to this as increasing ‘relative’ real wages. The results indicate that higher ‘relative’ real wage growth rebalances national income: the labour share increases since relative wages rise (by definition) and employment is roughly maintained (endogenous response). A rising labour share has in turn a positive effect overall on the South African economy in the model: consumption expenditure rises as national income shifts towards wage earners as a whole, who have a higher propensity to consume than profit earners. However, there are moderate or small negative effects as investment as a share of GDP falls marginally, as the profit rate falls (though the absolute level of investment is higher as GDP rises), employment declines marginally, and there is slight weakening of the current account. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ilo:ilowps:995005693502676&r=opm |
| By: | Judit Kreko (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Science); Gabor Oblath (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Science) |
| Abstract: | We investigate (i) the characteristics of real economic and price convergence, (ii) the relationship between economic growth (convergence) and real exchange rate (RER) misalignments within the European Union (EU) during the period 1995–2016. In addition to the relative external price level of GDP, we quantified an alternative indicator for the RER: the internal relative price of services to goods, as measured from the expenditure side of GDP. We interpreted RER-misalignments as deviations from levels consistent with levels of economic development among EU countries. Regarding real convergence, the “catching up” of the less developed member states to the more affluent ones within the EU was expressly rapid in terms of relative per capita growth measured at current PPPs; it was less impressive if measured at constant PPPs, and rather modest in terms of relative real GDP-growth. As for price levels and the relative price of services to goods, a rapid convergence could be observed until the international financial crisis, but this process halted in 2008. Using pooled OLS and dynamic panel techniques, we found that within the EU there is a negative relationship between the contemporaneous sign of RER-misalignment (based on both the external price level and internal relative prices) and economic growth: over- (under-) valuations are associated with lower (higher) growth. This is mainly due to developments in countries operating under fixed exchange rate regimes. Our results indicate that the level of development does not influence the strength of the growth-misalignment relationship within the EU. These results are robust to the applied panel estimation method. Regarding the external price level, we find that the positive relationship between undervaluation and growth diminishes with increasing size of undervaluation. The aggregate effect of misalignments is significantly negative on both export market shares and the ratio of gross fixed capital formation to GDP: both the competitiveness and the investment channel play an important role in the relationship between growth and RER misalignments. As an extension, we analyse the relationship between growth and the misalignment of wages from productivity levels; “wage-misalignments” are also negatively associated with economic growth. Although our study carries policy messages – in particular, mild real exchange rate undervaluations are positively, while overvaluations are negatively associated with growth and real economic convergence – the RER is an endogenous variable, which is not under direct policy control. Our results point to the importance of a growth strategy avoiding overvaluation on the one hand, and to the futility of aiming at excessive undervaluation, on the other. |
| Keywords: | real economic and price level convergence; external and internal relative prices; exchange rate misalignment |
| JEL: | E01 O40 O47 O52 P22 P27 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1825&r=opm |
| By: | Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud |
| Abstract: | We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons relevant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate determination. We then proxy unobserved QE shocks by future changes in the relative size of central banks’ balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE measures have large and persistent effects on the exchange rate. For example, our estimates imply that the ECB’s APP program which raised the ECB’s balance sheet relative to that of the Federal Reserve by 35 percentage points between September 2014 and the end of 2016 depreciated the euro vis-à-vis the US dollar by a 12%. Regarding transmission channels, we find that a relative QE shock that expands the ECB’s balance sheet relative to that of the Federal Reserve depreciates the US dollar-euro exchange rate by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in currency risk premia. Changes in the expectations about the future monetary policy stance, reflecting the “signalling” channel of QE, also contribute to the exchange rate response to QE shocks. JEL Classification: E5, F3 |
| Keywords: | CIP deviations, interest rate parity condition, quantitiative easing |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182197&r=opm |
| By: | de Bondt, Gabe; Vermeulen, Philip |
| Abstract: | We estimate business cycle regime switching logit models for G7 countries to determine the effect of duration of the current business cycle phase and of foreign recessions on the likelihood that expansions and recessions come to an end. With respect to expansions in a G7 country, we find that the probability they end roughly doubles each time another G7 country falls into a recession. We also find that expansions in the US and Germany are duration dependent, i.e. are more likely to end as they grow older. This contrasts with other G7 countries where expansions are not duration dependent. With respect to recessions in a G7 country, we find that the likelihood of them coming to an end is not affected by other G7 countries’ recessions. We find duration dependence of recessions for all G7 countries, i.e. recessions that have gone on for a while are more likely to end. JEL Classification: E32, C41 |
| Keywords: | business cycles, duration dependence, recessions, regime switching logit model |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182205&r=opm |
| By: | Kazeem B. Ajide (University of Lagos, Lagos, Nigeria); Ibrahim D. Raheem (University of Kent, Canterbury, UK); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | This study contributes to the dollarization literature by expanding its determinants to account for different dimensions of globalization, using the widely employed KOF index of globalization. Specifically, globalization is “unbundled†into three different layers namely: economic, social and political dimensions. The study focuses on 25 sub-Saharan African (SSA) countries for the period 2001-2012.Using the Tobit regression approach, the following findings are established. First, from both economic and statistical relevance, the social and political dimensions of globalization constitute the key dollarization amplifiers, while the explanatory power of the economic component is weaker on dollarization. Second, consistent with the theoretical underpinnings, macroeconomic instabilities (such as inflation and exchange rate volatilities) have the positive expected signs. Third, the positive association between the accumulation of international reserves and dollarization is also apparent. Policy implications are discussed. |
| Keywords: | Dollarization; Globalization; sub-Saharan Africa; Tobit regression |
| JEL: | E41 F41 C21 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:afe:wpaper:18/029&r=opm |
| By: | Ly-Dai, Hung |
| Abstract: | We characterize the safety of public debt by one cross-section sample of 160 economies. For demand analysis, the public debt is safer for larger financial market size, higher financial development level, lower inflation rate and greater political stability. For sup- ply analysis, by a huger debt stock, the safety improves in economies with high income per capita but deteriorates in economies with low income per capita. The results are robust for Instrument-Variable regressions. |
| Keywords: | Safe Assets, Credit Ratings, Financial Development |
| JEL: | F21 F31 F41 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90237&r=opm |