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on Open Economy Macroeconomics |
| By: | Silvia Albrizio (Bank of Spain); Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University) |
| Abstract: | How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel. |
| Keywords: | Monetary policy spillovers; International bank lending channel; Cross-border banking flows; Global financial cycles; Local projections |
| JEL: | E52 F21 F32 F42 |
| Date: | 2019–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_017&r=all |
| By: | Belke, Ansgar H. (University of Duisburg-Essen); Domnick, Clemens (University of Duisburg-Essen) |
| Abstract: | This paper examines the linkages between the trade of goods and financial assets. Do both flows behave as complements (implying a positive correlation) or as substitutes (negative correlation)? Although a classic topic in international macroeconomics, the empirical evidence has remained relatively scarce so far, in particular for the Euro area where trade and financial imbalance played a prominent role in the build-up of the European sovereign debt crisis. Consequentially, we use a novel dataset, providing estimates for financial flows and its four main categories for 42 countries and covering the period from 2002-2012, to test the so-called trade-finance nexus. Since theoretical models stress that both flows might be influencing each other simultaneously, we introduce a novel time-varying instrumental variable based on capital control restrictions to estimate a causal effect. The results of the gravity regressions support theories that underline the complementarity between exports and capital flows. When testing the trade-finance nexus for different types of capital flows, the estimated coefficient is most pronounced for foreign direct investment, in line with theories stressing informational frictions. Robustness checks in the form of different estimation methods, alternative proxies for capital flows and sample splits confirm the positive relationship. Interestingly, the trade-finance nexus does not differ among countries belonging to the EMU, the European Union or among core and peripheral Euro area countries. |
| Keywords: | capital flows, economic integration, Heckscher-Ohlin paradigm, interaction between trade integration and capital mobility, trade |
| JEL: | F14 F15 F21 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12564&r=all |
| By: | Ben Broadbent (Bank of England; Centre for Macroeconomics (CFM)); Federico Di Pace (Bank of England); Thomas Drechsel (University of Maryland; Centre for Macroeconomics (CFM)); Richard Harrison (Bank of England; Centre for Macroeconomics (CFM)); Silvana Tenreyro (Bank of England; London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)) |
| Abstract: | The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary ‘sweet spot’ for tradable producers before the slowdown in tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materialises. The negative news about tradable sector productivity also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our analysis, we provide a quantitative analysis of the UK business cycle. |
| Keywords: | Brexit, Small open economy, Productivity, Tradable sector, UK economy |
| JEL: | E13 E32 F17 F47 O16 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1916&r=all |
| By: | Pierpaolo Benigno; Linda M. Schilling; Harald Uhlig |
| Abstract: | We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable. |
| JEL: | D53 E4 F31 G12 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26214&r=all |
| By: | George A. Alessandria; Horag Choi |
| Abstract: | We study how international trade and the exporting decisions of establishments affect establishment creation over the business cycle in a general equilibrium model. The model captures two key features of establishment and exporter dynamics: i) new establishments start small and grow over time and ii) exporters tend to be bigger and more productive than non-exporters and remain so for some time. When the cost of creating establishments fluctuates with aggregate productivity, we find the model can generate procyclical fluctuations in the stock of domestic establishments and importers similar to the data. Without international trade, entry is weakly countercyclical and too smooth. The model also generates fluctuations in the stock of importers, exporters, and domestic establishments of similar magnitude to those in the data. With an entry margin, we also find that output is hump-shaped following a productivity shock since investments in creating establishments and exporters generate an incentive to delay accumulating physical capital. This hump is stronger in an open economy model and strongly increases the value of creating new establishments in a boom. |
| JEL: | E32 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26212&r=all |
| By: | Belke, Ansgar H. (University of Duisburg-Essen); Volz, Ulrich (SOAS University of London) |
| Abstract: | Since the demise of the Bretton Woods system, the yen has seen several episodes of strong appreciation, including in the late 1970s, after the 1985 Plaza Agreement, the early and late 1990s and after 2008. These appreciations have not only been associated with "expensive yen recessions" resulting from negative effects on exports; since the late 1980s, the strong yen has also raised concerns about a de-industrialisation of the Japanese economy. Against this backdrop, the paper investigates the effects of changes to the yen exchange rate on the hollowing out of the Japanese industrial sector. To this end, the paper uses both aggregate and industry‐specific data to gauge the effects of yen fluctuations on the output and exports of different Japanese industries, exploiting new data for industry‐specific real effective exchange rates. Our findings support the view that the periods of yen appreciation had more than just transitory effects on Japanese manufacturing. The results also provide indication of hysteresis effects on manufacturing. While there are certainly also other factors that have contributed to a hollowing out of Japanese industry, a strong yen played a role, too. |
| Keywords: | Yen appreciation, exchange rates, japanese manufacturing, hollowing out, hysteresis |
| JEL: | F31 O14 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12565&r=all |
| By: | Mardi Dungey; Renee Fry-McKibbin; Vladimir Volkov |
| Abstract: | This paper presents evidence on the macroeconomic adjustment of a resource-rich country to a resource boom using the effects of Chinese industrialisation on Australia from 1988 to 2016. An SVAR model is specified, incorporating a proxy for Chinese resource demand and commodity prices to identify the effects of commodity supply and demand shocks on the Australian macroeconomy. We develop a multivariate historical decomposition to show how resource sector shocks deviate the macroeconomy away from the projection. The paper identifies four phases of the transmission of the resource boom before its conclusion in 2015. |
| Keywords: | Chinese resource demand, SVAR, multivariate historical decomposition, commodity demand shock, commodity supply shock |
| JEL: | C51 E32 F43 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-63&r=all |
| By: | Łukasz Rachel; Lawrence H. Summers |
| Abstract: | We argue that the economy of the industrialized world taken as a whole is currently – and for the foreseeable future will remain – highly prone to secular stagnation. But for extraordinary fiscal policies, real interest rates would have fallen much more and be far below their current slightly negative level, current and prospective inflation would be further short of the two percent target levels and past and future economic recoveries would be even more sluggish. We start by arguing that, contrary to current practice, neutral real interest rates are best estimated for the bloc of all industrial economies given capital mobility between them and relatively limited fluctuations in their aggregated current account. We show, using standard econometric procedures and looking at direct market indicators of prospective real rates, that neutral real interest rates have declined by at least 300 basis points over the last generation. We argue that these secular movements are in larger part a reflection of changes in saving and investment propensities rather than the safety and liquidity properties of Treasury instruments. We highlight the observation that levels of government debt, the extent of pay-as-you-go old age pensions and the insurance value of government healthcare programs have all ceteris paribus operated to raise neutral real rates. Using estimates drawn from the literature, as well as two general equilibrium models emphasizing respectively life-cycle heterogeneity and individual uncertainty, we suggest that the “private sector neutral real rate” may have declined by as much as 700 basis points since the 1970s. |
| JEL: | E43 E44 E50 E60 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26198&r=all |
| By: | Pietro Cova (Bank of Italy); Filippo Natoli (Bank of Italy) |
| Abstract: | From the second half of the 1990s, the high saving propensity in emerging economies triggered massive inflows towards safe assets in the United States; then, from the early 2000s, global banks also increased investment in US markets targeting riskier securities. We investigate to what extent the global saving glut and the global banking glut have stimulated risk taking, and find significant effects on credit spreads, market volatility and bank leverage. In a VAR framework, we also detect linkages between foreign inflows, US household indebtedness and house prices, suggesting a substan- tial risk-taking channel. Our findings provide evidence of the autonomous role of foreign financial flows during the run-up to the global financial crisis. |
| Keywords: | saving glut, banking glut, capital flows, banking leverage, risk-taking channel |
| JEL: | F32 F33 F34 |
| Date: | 2019–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_015&r=all |
| By: | David Finck (Justus-Liebig-University Gießen, Germany); Peter Tillmann (Justus-Liebig-University Gießen, Germany) |
| Abstract: | This paper studies the changing nature of inflation dynamics in small open economies and the shifting output-inflation trade-off. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks ex- plain large parts of inflation and output dynamics. The global shocks are procycli- cal with respect to the domestic components of economic activity. We estimate Phillips curve regressions based on alternative decompositions of output into global and domestic components. For the domestic component of GDP we find a positive and significant Phillips curve slope. While including the output component driven by oil prices ’flattens’ the Phillips curve, the component driven by global demand shocks ’steepens’ the trade-off. Hence, whether or not global shocks flatten the Phillips curve crucially depends on the nature of these global shocks. A series of counterfactuals supports these findings and suggests that the role of monetary pol- icy and exchange rate shocks is limited. |
| Keywords: | inflation targeting, business cycle, open economy, monetary policy, Phillips curve |
| JEL: | E3 E5 F4 |
| Date: | 2019–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_022&r=all |
| By: | Fernando Chertman (University of California, Santa Cruz); Michael Hutchison (University of California, Santa Cruz); David Zink (University of California, Santa Cruz) |
| Abstract: | This paper investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets--India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are subordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile’s policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs. |
| Date: | 2019–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_016&r=all |
| By: | Akhmadieva, Veronika (Birkbeck, University of London); Smith, Ron P (Birkbeck, University of London) |
| Abstract: | This paper examines whether the establishment of the euro caused structural breaks in the main macroeconomic relationships of member countries. It compares eight original members of the common currency with four European countries that did not join. The analysis constructs counterfactuals using both single equation models and a six equation vector autoregression with foreign exogenous variables, VARX*, explaining output, inflation, equity prices, exchange rates and short and long interest rates. It considers which equations changed the most and the most likely dates for any structural break. |
| Keywords: | euro, structural-breaks, GVAR |
| JEL: | C5 E5 F4 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1903&r=all |
| By: | Youngmin BAEK; HAYAKAWA Kazunobu; TSUBOTA Kenmei; URATA Shujiro; YAMANOUCHI Kenta |
| Abstract: | Tariff pass-through is a vital issue for considering who and to what extent the trade liberalization benefits. This paper empirically examines the tariff pass-through in wholesaling by employing the wholesale firm-level data in Japan. We found that importing wholesalers significantly raised their margin ratio (i.e., (sales – procurements) / sales) against tariff reduction. On average, a 1% reduction of tariffs raised the margin ratio by around 0.25 percentage point. This rise is equivalent to the rise of sales prices to procurement prices by around 0.34%. For comparison purposes, we also analyzed tariff pass-through for the import and consumer prices and found that a 1% reduction of tariffs raised import prices (export prices for exporters) by 0.49% and decreased consumer prices by 0.08%. In sum, wholesalers in importing country enjoy the smaller part of tariff rent than producers in exporting country but the larger part than consumers in importing country. |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19064&r=all |
| By: | Georgios Georgiadis (European Central Bank); Ben Schumann (European Central Bank) |
| Abstract: | Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy co-ordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic gen- eral equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the US dollar multilaterally decline with an economy’s export-import US dollar pricing share differential, i.e. the difference between the share of an economy’s exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy’s net exports in response to multilateral changes in the US dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border trans- mission channels, we document that consistent with the prediction from DCP the output spillovers from US dollar appreciation correlate negatively with recipient economies’ export-import US dollar invoicing share differentials. We document that these findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, as well as to accounting for the role of commodity trade in US dollar invoicing. |
| Keywords: | Dominant-currency pricing, US shocks, spillovers |
| JEL: | F42 E52 C50 |
| Date: | 2019–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_021&r=all |