|
on Open Economy Macroeconomics |
| By: | Ricardo Caballero; Güneş Kamber |
| Abstract: | Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the GFC. We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefited from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise -we do not take a stand on this tradeoff). |
| Keywords: | risk-off, conventional and unconventional monetary policy, policy-puts, spillovers, macroeconomic fundamentals, developed and emerging markets, Asia-Pacific region |
| JEL: | E40 E44 E52 E58 F30 F41 F44 G01 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:772&r=all |
| By: | de Grauwe, Paul; Ji, Yuemei |
| Abstract: | Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries. |
| Keywords: | Animal spirits Behavioural macroeconomics Monetary policy Inflation target Zero lower bound Business cycles |
| JEL: | E32 E58 F42 |
| Date: | 2018–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:87286&r=all |
| By: | Accominotti, Olivier; Cen, Jason; Chambers, David; Marsh, Ian W |
| Abstract: | This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders. |
| Keywords: | carry trade; Exchange Rate Regime |
| JEL: | F31 G12 G15 N20 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13571&r=all |
| By: | Katherine Eriksson; Katheryn Russ; Jay C. Shambaugh; Minfei Xu |
| Abstract: | Using data over more than a century, we show that shifts in the location of manufacturing industries are a domestic reflection of what the international trade literature refers to as the product cycle in a cross-country context, with industries spawning in high-wage areas with larger pools of educated workers and moving to lower-wage areas with less education as they age or become “standardized.” We exploit the China shock industries as a set of industries that were in the late-stage product cycle by 1990 and show how the activity in those industries shifted from high-innovation areas to low-education areas over the 20th century. The analysis also suggests that the resilience of local labor markets to manufacturing shocks depends on local industries’ phase in the product cycle, on local education levels, and on local manufacturing wages. The risk of unemployment and detachment from the labor force rises most when a shock hits in areas where an industry already has begun phasing out, wages are high, or education levels are low. The results are consistent with the belief that there are long-term, secular trends in U.S. industrial structure driving the movement of industries, which shocks may mitigate or accelerate. |
| JEL: | F10 F16 F43 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25646&r=all |
| By: | Eleni Iliopulos; Erica Perego; Thepthida Sopraseuth |
| Abstract: | We study the international transmission of shocks when agents form expectations under adaptive learning and imperfect information. To this aim we consider a two-country model featuring financial frictions, nominal rigidities, learning and Home information bias (as a source of information imperfection). We show that the more pronounced the Home information bias, the less agents track the international transmission of shocks, as it would otherwise be the case under rational expectations. The model succeeds in matching the low business cycle synchronization of consumption, while generating a positive output co-movement. In doing so, the model takes the theory closer to the data with respect to the output-consumption co-movement anomaly. The model also exhibits departure from the Uncovered Interest rate Parity. |
| Keywords: | Financial Frictions;International Business Cycles;Learning;Uncovered Interest Rate Parity |
| JEL: | D84 E44 E51 F41 F42 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2019-03&r=all |
| By: | Victor Pontines |
| Abstract: | Using a unique data set on provincial net factor income flows disaggregated across the three asset classes of debt, equity and FDI reinvested earnings in Korea, we investigated how these asset channels impacted consumption risk sharing during the Global Financial Crisis and the European sovereign debt crisis. Adopting spatial panel methods, this study found that net receipts of debt, equity and FDI retained earnings have all contributed favorably to consumption risk sharing during these crises episodes, with FDI retained earnings robustly positive in its contribution in buffering shocks to consumption. We also found suggestive evidence that net equity receipts rather than net debt receipts contributed more to risk sharing during these episodes. Overall, our results indicate that different asset channels can provide the insurance needed to cushion the economy against adverse shocks. |
| Keywords: | Consumption risk sharing, Consumption smoothing, Factor income flows, Spatial panel |
| JEL: | E25 F36 G11 R12 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-23&r=all |
| By: | Stefan Hohberger; Marco Ratto; Lukas Vogel |
| Abstract: | We estimate a three-region (DE-REA-RoW) structural macroeconomic model, and we provide a counterfactual on how nominal exchange rate flexibility would have affected the German trade balance (TB) by simulating the shocks of the estimated model under a counterfactual flexible exchange rate regime. The actual and counterfactual TB trajectories are similar overall. Results suggest an around 2 pp lower trade surplus during 2012-15 together with a stronger real effective exchange rate in the counterfactual. The latter shows a similar upward trend in the TB, however, and the 2012-15 gap between actual and counterfactual closes at the end of the sample. |
| Keywords: | Germany, euro, exchange rate, trade balance |
| JEL: | E44 E52 E53 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7543&r=all |
| By: | Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon |
| Abstract: | We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed. |
| Keywords: | Euro Area;Equilibrium Exchange Rates;Cluster Analysis;Factor Analysis;Macroeconomic Imbalances |
| JEL: | F33 C38 E5 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2019-05&r=all |
| By: | Demir, Ishak |
| Abstract: | While Federal Reserve continues to normalize its monetary policy on the back of a strengthening U.S. economy, the possibility of mimicking U.S. policy actions and so the debate of monetary autonomy has been particularly heated in the most of developing countries, even in advanced economies. We analyse the role played by country-specific characteristics in domestic monetary policy autonomy to set short-term interest rates in the face of spillovers from of U.S. monetary policy as global external shocks. First, we extricate the non-systematic (non-autonomous) component of domestic interest rates which is related to business cycle synchronisation across countries. Then we employ an interacted panel VAR model, which allows impulse response functions to vary by country characteristics for a broad sample of countries. We find strong empirical evidence for the role of exchange rate flexibility, capital account openness in line with trilemma, but also a significant role for other country characteristics, such as dollarisation in the financial system, the presence of a global bank, use of macroprudential policies, and the credibility of fiscal and monetary policy. |
| Keywords: | monetary policy autonomy,global financial cycle,international spillovers,trilemma,country-specific characteristics,cross-country difference,dilemma |
| JEL: | C38 E43 E52 E58 F42 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:193694&r=all |
| By: | Jongrim Ha; M. Ayhan Kose; Franziska L. Ohnsorge |
| Abstract: | We study the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. Our methodology allows us to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. We report three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods. |
| Keywords: | Global inflation, synchronization, dynamic factor model, advanced economies, emerging markets, developing economies. |
| JEL: | E31 E32 F42 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-24&r=all |