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on Open Economy Macroeconomics |
| By: | Georgiadis, Georgios (European Central Bank); Zhu, Feng (Bank of International Settlements) |
| Abstract: | We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging market economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the predictions from the trilemma: Both exchange rate flexibility and capital controls reduce the sensitivity of local to base-country policy rates. However, we also find evidence that is consistent with the notion that the financial channel of exchange rates highlighted in recent work reduces the extent to which local policymakers decide to exploit the monetary autonomy in principle granted by flexible exchange rates in specific circumstances: The sensitivity of local to base-country policy rates for an economy with a flexible exchange rate is stronger when it exhibits negative foreign-currency exposures which stem from portfolio debt and bank liabilities on its external balance sheet and when base-country monetary policy is tightened. The intuition underlying this finding is that it may be optimal for local monetary policy to mimic the tightening of base-country monetary policy and thereby mute exchange rate variation because a depreciation of the local currency would raise the cost of servicing and rolling over foreign-currency debt and bank loans, possibly up to a point at which financial stability is put at risk. |
| Keywords: | Trilemma; financial globalization; monetary policy autonomy; spillovers |
| JEL: | C50 E52 F42 |
| Date: | 2019–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:363&r=all |
| By: | Fernando Giuliano; Emiliano Luttini |
| Abstract: | We use transaction-level customs data to document that a large majority of Chilean imports are invoiced in dollars regardless of country of origin and sector. We study the implications of this fact for the determination of exchange rate pass-through (ERPT) to border prices. We find that the special role of the dollar in international trade has real effects, but bilateral exchange rates with respect to exporter currencies also matter in the medium-term. In particular, exchange rate fluctuations against the dollar account for most of the ERPT in the short run and are still relevant after two years. However, the cumulative ERPT with respect to the exporter country's currency increases with time and after two years accounts for most of the ERPT to border prices. |
| Keywords: | invoice currency, exchange rate pass-through |
| JEL: | F3 F4 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:784&r=all |
| By: | Egemen Eren; Semyon Malamud |
| Abstract: | We propose a "debt view" to explain the dominant international role of the dollar. We develop an international general equilibrium model in which firms optimally choose the currency composition of their nominal debt. Expansionary monetary policy in downturns prevents Fisherian debt deflation through its effects on inflation and exchange rates, and alleviates financial distress. Theoretically, the dominant currency is the one that depreciates in global downturns over horizons of corporate debt maturity. Empirically, the dollar fits this description, despite being a short-run safe-haven currency. We provide broad empirical support for the debt view. We also study the globally optimal monetary policy. |
| Keywords: | dollar debt, dominant currency, exchange rates, inflation, debt deflation |
| JEL: | E44 E52 F33 F34 F41 F42 F44 G01 G15 G32 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:783&r=all |
| By: | Marcin Kolasa (Narodowy Bank Polski); Grzegorz Wesołowski (Narodowy Bank Polski) |
| Abstract: | This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets, an increase in international comovement of term premia, and change in the responsiveness of the exchange rate to interest rate differentials. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. |
| Keywords: | quantitative easing, international spillovers, bond market segmentation, term premia |
| JEL: | E44 E52 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:309&r=all |
| By: | Daryna Grechyna (Department of Economic Theory and Economic History, University of Granada.) |
| Abstract: | This paper explores the impact of international financial and trade networks on current account balances in a large sample of developing and developed countries. The financial and trade inter-country networks centrality measures are computed based on the quantity and strength of the financial assets flows (for financial network) or export flows (for trade network) among the countries. I rely on a panel data and employ the fundamental characteristics of a country’s trading partners as instruments for the position of a given country in the international networks. I find that a more central position in the international trade or financial network improves the current account balance in developed and developing countries. Besides, the impact of international financial network on current account has become stronger over the past two decades and a better position in this network helped improve the current account balances during the Great Recession. |
| Keywords: | current account; international financial network; international trade network; panel data. |
| JEL: | F32 F41 F42 |
| Date: | 2019–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:19/08&r=all |
| By: | Luca Pensieroso; Romain Restout |
| Abstract: | Was the Gold Standard a major determinant of the onset and the protracted character of the Great Depression of the 1930s in the United States and Worldwide? In this paper, we model the ‘Gold-Standard hypothesis’ in a dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand what happened in the 1930s, especially outside the United States. Contrary to what is often maintained in the literature, our results suggest that the vague of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the United States did not act as a relief. On the contrary, they made the Depression worse. |
| Keywords: | Gold Standard, Great Depression, Dynamic General Equilibrium. |
| JEL: | N10 E13 N01 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2019-23&r=all |
| By: | Zhen Huo (Yale University); Andrei A. Levchenko (University of Michigan, NBER, & CEPR); Nitya Pandalai-Nayar (University of Texas at Austin & NBER) |
| Abstract: | This paper uses sector-level data for 30 countries and up to 28 years to provide a quantitative account of the sources of international GDP comovement. We propose an accounting framework to decompose comovement into the components due to correlated shocks, and to the transmission of shocks across countries. We apply this decomposition in a multi-country multi-sector DSGE model. We provide an analytical solution to the global influence matrix that characterizes every countryÕs general equilibrium GDP elasticities with respect to various shocks anywhere in the world. We then provide novel estimates of country-sector-level technology and non-technology shocks to assess their correlation and quantify their contribution to comovement. We find that TFP shocks are virtually uncorrelated across countries, whereas non-technology shocks are positively correlated. These positively correlated shocks account for two thirds of the observed GDP comovement, with international transmission through trade accounting for the remaining one third. However, trade opening does not necessarily increase GDP correlations relative to autarky, because the contribution of trade openness to comovement depends on whether sectors with more or less correlated shocks grow in influence as countries increase input linkages. Finally, while the dynamic model features rich intertemporal propagation of shocks, quantitatively these components contribute little to the overall GDP comovement as impact effects dominate. |
| Keywords: | TFP shocks, non-technology shocks, international comovement, input linkages |
| JEL: | F41 F44 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:669&r=all |
| By: | Camila Casas |
| Abstract: | In the presence of price rigidities, nominal exchange rate fluctuations can have real effects on the economy. External shocks may have differentiated effects across economic sectors depending on firms' marginal cost structure and features of the demand they face, such as strategic complementarities. I analyse the relationship between the exchange rate pass-through to export and import prices and volumes and the use of imported inputs in production, an important determinant of marginal cost. Using microdata from Colombia, I show that manufacturing industries differ significantly in their use of imported inputs and in the estimated exchange rate pass-through. I find a clear correlation between the use of imported inputs and the response of prices to changes in exchange rates. That is, the exchange rate pass-through to prices tends to be larger for industries in which firms use a larger share of imported inputs. The link is stronger in the case of exports, but the effect on the pass-through to import prices is also positive. In contrast, I do not find a clear correlation between the use of imported inputs and the response of traded quantities to changes in exchange rates. |
| Keywords: | exchange rate pass-through, export and import prices, export and import volumes, intermediate inputs |
| JEL: | F1 F2 L2 L6 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:787&r=all |
| By: | Fisher, Christoph (Deutsche Bundesbank) |
| Abstract: | Equilibrium real exchange rate and corresponding misalignment estimates differ tremendously depending on the panel estimation method used to derive them. Essentially, these methods differ in their treatment of the time-series (time) and the cross-section (space) variation in the panel. The study shows that conventional panel estimation methods (pooled OLS, fixed, random and between effects) can be interpreted as restricted versions of a correlated random effects (CRE) model. It formally derives the distortion that arises if these restrictions are violated and uses two empirical applications from the literature to show that the distortion is generally very large. This suggests the use of the CRE model for the panel estimation of equilibrium real exchange rates and misalignments. |
| Keywords: | Equilibrium real exchange rate; panel estimation method; correlated random effects model; productivity approach; BEER; price competitiveness |
| JEL: | C23 F31 |
| Date: | 2019–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:362&r=all |
| By: | Thierry Mayer; Walter Steingress |
| Abstract: | This paper shows that real effective exchange rate (REER) regressions, the standard approach for estimating the response of aggregate exports to exchange rate changes, imply biased estimates of the underlying elasticities. We provide a new aggregate regression specification that is consistent with bilateral trade flows micro-founded by the gravity equation. This theory-consistent aggregation leads to unbiased estimates when prices are set in an international currency as postulated by the dominant currency paradigm. We use Monte-Carlo simulations to compare elasticity estimates based on this new "ideal-REER" regression against typical regression specifications found in the REER literature. The results show that the biases are small (around 1 percent) for the exchange rate and large (around 10 percent) for the demand elasticity. We find empirical support for this prediction from annual trade flow data. The difference between elasticities estimated on the bilateral and the aggregate levels reduce significantly when applying an ideal-REER regression rather than a standard REER approach. |
| Keywords: | trade elasticity, real effective exchange rate, gravity equation, dominant currency paradigm, aggregation bias |
| JEL: | F11 F12 F31 F32 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:786&r=all |
| By: | Jan Behringer; Till van Treeck |
| Abstract: | In this paper, we analyze how corporate sector behavior has affected national current account balances in a sample of 25 countries for the period 1980-2015. A consistent finding is that an increase (decrease) in corporate net lending leads to an increase (decrease) in the current account, controlling for standard current account determinants. We disentangle the current account effects of corporate saving and investment and we explore a number of alternative explanations of our results, including incomplete piercing of the "corporate veil", by households, foreign direct investment activities, a temporary crisis phenomenon, and changes in income inequality. We conclude that corporate sector saving is an important driver of macroeconomic trends and that the rise of corporate net lending especially in a number of current account surplus countries has contributed considerably to global current account imbalances. |
| Keywords: | Corporate sector, sectoral financial balances, current account determinants |
| JEL: | E21 F41 G35 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:196-2019&r=all |
| By: | Mirko Abbritti; Sebastian Weber |
| Abstract: | We build a two-country currency union DSGE model with endogenous growth to assess the role of cross-country differences in product and labor market regulations for long-term growth and for the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks, through endogenous TFP movements, can lead to permanent changes of output and real exchange rates. Differences are exacerbated when member countries have different product and labor market regulations. Less regulated economies are likely to have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment and disappointing TFP growth rates experienced in the less reform-friendly euro area members. |
| Date: | 2019–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/123&r=all |
| By: | Eduardo Levy Yeyati; Juan Francisco Gómez |
| Abstract: | Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate. |
| Keywords: | International reserves; exchange rate policy; capital flows; financial crisis |
| JEL: | E42 E52 F33 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpgobi:wp_gob_2018_7&r=all |
| By: | Kneer, Christiane (Bank of England); Raabe, Alexander (Graduate Institute Geneva) |
| Abstract: | This paper examines how UK banks channel capital inflows to the individual sectors of the domestic economy and to overseas residents. Information on the source country of foreign capital deposited with UK banks allows us to construct a novel Bartik instrument for capital inflows. Our results suggest that foreign funds boost bank lending to the domestic economy. This result is due to the positive effect of capital inflows on bank lending to non-financial firms and to other domestic financial institutions. Banks do not channel capital inflows directly to households or the public sector. Much of the foreign capital is also channelled back abroad, reflecting the role of the UK as a global financial centre. |
| Keywords: | Capital flows; bank lending; credit allocation; international finance; instrumental variables; international financial linkages |
| JEL: | F21 F30 F32 F34 G00 G21 |
| Date: | 2019–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0804&r=all |
| By: | Kenneth Clements (Economics Discipline, Business School, The University of Western Australia); Jiawei Si (Economics Discipline, Business School, The University of Western Australia); Long H. Vo (Economics Discipline, Business School, The University of Western Australia) |
| Abstract: | Are food prices more or less equalised across countries? In view of obvious barriers to trade (both naturally occurring and of a man-made nature) and currency gyrations, the answer would seem to be an unambiguous “No”, but we show this question is worthy of further investigation. In order for the law of one price (LOP) to hold, domestic prices must respond one-for-one to changes in world prices and exchange rates, but this is usually prevented by variations in mark-ups and/or trade barriers. We use data on consumer prices from the International Comparison Program and producer prices from the Food and Agriculture Organization to test for the LOP for food. While not completely conclusive, these tests show the various market wedges appear to be insufficiently important to prevent food prices to equalise over the longer term. |
| Keywords: | Food and agricultural prices, law of one price, exchange rates, market integration, panel unit root tests |
| JEL: | F30 F31 Q17 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:19-09&r=all |
| 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:abh:wpaper:18/034&r=all |
| By: | Tamim Bayoumi; Jelle Barkema |
| Abstract: | Using bilateral data on migration across US metro areas, we find strong evidence that increasing house price and income inequality has reduced long distance migration, the type most linked to jobs. For those migrating uphill, from a less to a more prosperous location, lower mobility is driven by increasing house price inequlity, as the disincentives from higher house prices dominate the incentives from higher earnings. By contrast, increasing income inequality drives the fall in downhill migration as the disincentives from lower earnings dominate the incentives from lower house prices. The model underlines the plight of those trapped in decaying metro areas—those “left behind”. |
| Date: | 2019–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/122&r=all |