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on Open Economy Macroeconomics |
| By: | J. Scott Davis; Michael B. Devereux |
| Abstract: | The use of international capital flow controls has become increasingly popular in academic and policy circles. But almost all the recent literature studies the case of a small economy, ignoring the spillover effects of capital controls to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. We consider both ex-ante capital controls (prudential) and ex-post controls (crisis management). In a large open economy, there is a tension between the desire to tax capital inflows to manipulate the terms-of-trade and tax capital outflows for either prudential or crisis management purposes. When capital controls are chosen non-cooperatively, we show that ex-post capital controls are unsuccessful in alleviating financial constraints in a crisis, and ex-ante capital controls are unsuccessful at reducing financial instability before the crisis. Non-cooperative capital controls leave the crisis-hit country even worse off than in an environment with unrestricted capital flows. In addition, a non-cooperative equilibrium with capital controls actually increases the likelihood of a financial crisis occurring. By contrast, capital controls can be effective under international cooperation and can significantly ease financial constraints when applied ex-post for crisis management and reduce the likelihood of a crisis when used ex-ante for prudential purposes. |
| JEL: | F40 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25710&r=all |
| By: | Atsushi Inoue; Barbara Rossi |
| Abstract: | What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy shocks as changes int he whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substancial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents'expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks. |
| Keywords: | exchange rates, zero-lower bound, unconventional monetary policy, forward guidance |
| JEL: | F31 F37 C22 C53 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1078&r=all |
| By: | VARTHALITIS, PETROS |
| Abstract: | This paper presents FIR-GEM: Fiscal IRish General Equilibrium Model. FIR-GEM is a small open economy DSGE model designed as fiscal toolkit for fiscal policy analysis in Ireland. To illustrate the model's potential for fiscal policy analysis, we conduct three types of experiments. First, we analyse the fiscal transmission mechanism through which Irish fiscal policy affects the Irish economy. Second, we compute fiscal multipliers for the main tax-spending instruments, namely government consumption, public investment, public wage bill, public transfers, consumption, labour and capital tax. We focus on a fiscal policy stimulus that is either implemented through spending increases or tax cuts. Third, we perform robustness analysis on key structural characteristics that can affect quantitatively the size of fiscal multipliers. We find that the size of fiscal multipliers in the Irish economy heavily depends on its degree of openness, the method of fiscal financing employed, the elasticity of the sovereign risk premia to Irish debt dynamics and the flexibility of Irish labour and product markets. |
| Keywords: | Keywords: Fiscal policy, DSGE, Ireland, Openness. |
| JEL: | E62 F41 F42 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93059&r=all |
| By: | Silvia Calò (Central Bank of Ireland); Mariarosaria Comunale (Bank of Lithuania & ECB) |
| Abstract: | In this paper we analyse the price competitiveness of the Italian regions by computing the Real Effective Exchange Rate (REER) for each region, deflated by CPI and vis-à-vis the main partner countries. We use them to look for the medium-term determinants, finding significant heterogeneities in the role of government consumption and investment expenditure. Government consumption has an extremely negative effect on competitiveness in North-Eastern Italy, Southern Italy and Lazio. Investment plays a negative role especially in the North-West, while it can be positive for competitiveness in Lazio and Southern Italy. We also find that the transfer theory does not necessarily hold and it even behaves in the opposite direction in case of North-Eastern Italy and Lazio. Lastly, we show that an increase in the regional price competitiveness influences regional growth positively only in the long run and spillovers may play a role. |
| Keywords: | Italian regions, government consumption, government investment, Real Effective Exchange Rate, growth. |
| JEL: | E62 F31 F41 R11 |
| Date: | 2019–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:456&r=all |
| By: | Martin, Feldkircher (Oesterreichische Nationalbank (Austrian Central Bank)); Thomas, Gruber (Oesterreichische Nationalbank (Austrian Central Bank)); Florian, Huber (University of Salzburg) |
| Abstract: | In this paper, we use a Bayesian global vector autoregressive model to analyze the macroeconomic effects of a flattening of euro area yield curves. Our findings indicate positive effects on real activity and prices, both within the euro area as well as in neighboring economies. Spillovers transmit through an exchange rate channel and a broad financial channel. We complement our analysis by conducting a portfolio optimization exercise. Our results show that multi-step-ahead forecasts conditional on the euro area yield curve shock improve Sharpe ratios relative to other investment strategies. |
| Keywords: | Unconventional monetary policy; spillovers; GVAR; minimum variance portfolio |
| JEL: | C30 E32 E52 F41 |
| Date: | 2019–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sbgwpe:2019_001&r=all |
| By: | Zubarev, Andrey (Зубарев, Андрей) (The Russian Presidential Academy of National Economy and Public Administration); Rybak, Konstantin (Рыбак, Константин) (The Russian Presidential Academy of National Economy and Public Administration) |
| Abstract: | This study covers theoretical and empirical works on capital mobility, characterizing the relationship between savings and investments. We carried out our own econometric calculations of the relationship between saving and investment rates for a sample of OECD countries, developing countries, and countries with a high dependence on hydrocarbon exports. The results of empirical analysis indicate an increase in capital mobility over time, but after the global financial crisis, capital mobility has decreased again. Developing countries and countries with a high dependence on hydrocarbons demonstrate greater capital mobility. |
| Keywords: | savings, investment, Feldstein-Horioka puzzle, commodity-exporting economies |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:031950&r=all |
| By: | Mariam El Hamiani Khatat; Romain M Veyrune |
| Abstract: | This paper introduces a theoretical framework for liquidity management under fixed exchange rate arrangement, derived from the price-specie flow mechanism of David Hume. The framework highlights that the risk of short-term money market rates un-anchoring from the uncovered interest rate parity due to money and foreign exchange market frictions could jeopardize financial stability and market development. The paper then discusses operational solutions that stabilize money market rates close to the level implied by the Uncovered Interest Rate Parity (UIP). Liquidity management under fixed exchange rate with an open capital account presents specific challenges due to: (1) the larger liquidity shocks induced by foreign reserve swings that challenge the development of money markets; and (2) more complicated liquidity forecasts. The theoretical framework is empirically tested based on the estimate of “offset” coefficients for Denmark and Hong Kong SAR. |
| Date: | 2019–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/58&r=all |
| By: | Charles W. Calomiris; Harry Mamaysky |
| Abstract: | We develop an empirical model of exchange rate returns, applied separately to samples of developed and developing economies’ currencies against the dollar. We incorporate into this model natural-language-based measures of the monetary policy stances of the large global central banks, and show that these become increasingly important in the post-crisis era. We find an important spillover effect from the monetary policy of the Bank of England, the Bank of Japan and the ECB to the exchange rate returns of other currencies against the dollar. Furthermore, we find that the relation between a developed country’s interest rate differential relative to the dollar (carry) and the future returns from investing in its currency switches sign from the pre- to the post-crisis subperiod, while for emerging markets the carry variable is never a significant predictor of returns. The high profit from the carry trade for emerging market currencies reflects persistent country characteristics likely reflective of risk rather than the interest differential per se. While measures of global monetary policy stance forecast exchange rate returns against the dollar, they do not predict exchange rate returns against other base currencies. Results regarding returns from carry, however, are insensitive to the choice of the base currency. We construct a no-arbitrage pricing model which reconciles many of our empirical findings. |
| JEL: | E4 F31 F34 G15 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25714&r=all |
| By: | Nguyen, Bao; Sum, Dek |
| Abstract: | Previous studies have mostly focused on the relationship between macroeconomic shocks and trade balance adjustments of resource-rich countries while largely overlooked countries with trade composition of high resource-export and strong import-dependence such as Papua New Guinea. Utilising a Bayesian Vector Autoregressive (BVAR) model, we quantify the relative importance of macroeconomic shocks on the country's trade balance adjustments and examine how they evolve over time. Our identification strategy takes advantage of the fact that shocks generated from the resource sector and non-resource sector would have heterogeneous impacts on trade activity. We document that at a different point in time, all identified shocks except inflation contributed significantly to the fluctuations in trade balance with varying magnitude. The impulse responses show that one standard deviation of devaluation in the real exchange rate and resource boom lead to an immediate improvement in the trade balance. Shocks in the non-resource sector and inflation are found to have a positive impact on the trade balance, but they are mostly statistically insignificant. |
| Keywords: | Bayesian VAR, Trade Balance, Resource-Rich Developing Countries, Import-dependent, Papua New Guinea |
| JEL: | F14 F31 F32 |
| Date: | 2019–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93033&r=all |
| By: | Vo Phuong Mai Le (Cardiff Business School, Aberconway Building, Cardiff University, Colum Drive, Cardiff, Wales, United Kingdom, CF 10 3EU); Ruthira Naraidoo (Department of Economics, University of Pretoria, Pretoria, South Africa) |
| Abstract: | This paper builds a small open economy model for a net commodity exporter to consider financial frictions and monetary policies in order to investigate the main determinants of business cycles. Since we make a distinction to the access of financial markets between the commodity and non-commodity sectors, we notice that as usual, a commodity price shock benefits the competitiveness of the economy and its borrowing terms. We outline a novel effect in this paper which we dub the “financial market effect” following a positive commodity price shock that decreases the credit premium and hence exacerbate the commodity price boom. However, the negative sectoral downturn affects entrepreneur credit together with disinflationary pressures of a real exchange rate appreciation. This opens the role for stabilization policies which we analyze comparing three types of monetary regimes. Estimating the model on South Africa, a major commodity exporting economy with inflation targeting regime, we find as conventional wisdom suggests that a hypothetical Taylor rule targeting the price-level allows for adjustment in inflation expectations that can dampen disinflationary pressures. Furthermore, due to smoother change in nominal rate of interest, there is lesser variability in financial markets. |
| Keywords: | Business cycles, Small open economy, Commodity prices, Financial frictions, Emerging markets, Monetary policy, Price-level targeting, South Africa economy |
| JEL: | E32 E44 E58 F41 F44 O16 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201928&r=all |
| By: | Coletta Frenzel Baudisch (Justus Liebig University Giessen) |
| Abstract: | Since the turn of the millennium, China opened up internationally both in terms of its current account (trade) and its capital account, even though the opening of the latter happened de facto, not de jure. With respect to China being Africa's largest trading partner and developing investor in combination with its desire for African natural resources, we embark on an analysis of the impact of several categories of Chinese capital flows to African economies on the bilateral real exchange rate. We conduct a panel data analysis by means of a Hausman-Taylor-estimation over the period 2003-2016. Our results suggest that capital flows from China to Africa in the form of mainly economic cooperation projects, but also FDI contribute to an appreciation of the local currencies vis à vis the RMB, while no such effect appears for aid fl ows from China. The former two categories may pose a risk of Dutch Disease effects. Since many African countries have pegged their currencies to the Euro, and the Renminbi abandoned its peg to the US Dollar over the sample period, valuation effects of capital fl ows must be interpreted in this context. |
| Keywords: | real bilateral exchange rates, FDI, economic cooperation, aid, trade, Sino-African economic relations. |
| JEL: | F19 F21 F35 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201910&r=all |
| By: | Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School); Zhu, Zheyi (Cardiff Business School) |
| Abstract: | We ask whether a model of the US and Europe trading with the rest of the world can match the facts of world behaviour in a powerful indirect inference test. One version has uncovered interest parity (UIP), the other risk-pooling. Both pass the test but the most probable is risk-pooling. This is consistent with risk-pooling failing a number of single equation tests, as has been found in past work; we show that these tests will typically reject risk-pooling when it in fact prevails. World economic behaviour under risk-pooling shows much stronger spillovers than under UIP with opposite monetary responses to the exchange rate. We argue that the risk-pooling model therefore demands more attention from policy-makers. |
| Keywords: | Opene conomy, UIP, risk-pooling, test, Indirect Inference |
| JEL: | C12 E12 F41 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2019/10&r=all |