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on Open Economy Macroeconomics |
| By: | Fernando Arce; Julien Bengui; Javier Bianchi |
| Abstract: | This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves. |
| JEL: | E0 F3 F31 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26236&r=all |
| By: | Menzie D. Chinn; Hiro Ito |
| Abstract: | Global current account imbalances have reappeared, although the extent and distribution of these imbalances are noticeably different from those experienced in the middle of the last decade. What does that recurrence mean for our understanding of the origin and nature of such imbalances? Will imbalances persist over time? Informed by empirical estimates of the determinants of current account imbalances encompassing the period after the global recession, we find that – as before – the observable manifestations of the factors driving the global saving glut have limited explanatory power for the time series variation in imbalances. Fiscal factors determine imbalances, and have accounted for a noticeable share of the recent variation in imbalances, including in the U.S. and Germany. For advanced economies, the financial component of the current account has been playing an increasing role to determine the movements of the account. Examining observable policy actions, it is clear that net official flows have been associated with some share of imbalances, although tracing out the motivations for intervention is difficult. Looking forward, it is clear that policy can influence global imbalances, although some component of the U.S. deficit will likely remain given the U.S. role in generating safe assets. |
| JEL: | F32 F41 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26226&r=all |
| By: | Ansgar Belke; Timo Baas |
| Abstract: | For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances. |
| Keywords: | Current account deficit, Oil price shocks, DSGE models, Search and matching labor market, Monetary policy |
| JEL: | E32 F32 Q43 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201903&r=all |
| By: | Hossein Tavakolian; Hamed Ghiaie (Université de Cergy-Pontoise, THEMA) |
| Abstract: | This paper develops a DSGE model for a small open oil economy which has two rates at official and free (unofficial) markets for foreign currency. In this model, government has access to foreign currency by supplying oil in international markets. Using the oil revenue, the government provides the Central Bank and essential imported goods with foreign currency at the official rate; Other goods are imported at the unofficial rate. The CB’s objective is to minimize the difference between nominal free and official exchange rates. To do so, the CB uses three policy instruments: i) either holds foreign currency as financial assets or sells it to the free market at the unofficial rate, ii) nominal monetary base growth rate and iii) nominal depreciation of official exchange rate. These instruments are applied in this paper in four scenarios of CPI targeting and PPI targeting in both dual and unified exchange rate regimes. Through a welfare analysis, this paper indicates that PPI targeting works better than CPI targeting in this economy. As well, this paper illustrates that PPI targeting under unified system considerably increases welfare. In addition, the interaction between fiscal and monetary policy is assessed. The results show that monetary and exchange rate policies are also more effective when fiscal authority follows a procyclical fiscal rule. |
| Keywords: | DSGE model, Dual-Exchange Rate System, PPI Inflation Targeting. |
| JEL: | E52 E58 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2019-09&r=all |
| By: | Ansgar Belke; Clemens Domnick |
| 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: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201904&r=all |
| By: | François Fontaine; Julien Martin; Isabelle Mejean |
| Abstract: | We study the cross-sectional dispersion of prices paid by EMU importers for French products. We document a significant level of price dispersion both within product categories across exporters, and within exporters across buyers. This latter source of price discrepancies, sellers' price discrimination across buyers, is indicative of deviations from the law-of-one price. Price discrimination (i) is substantial within the EU, within the euro area, and within EMU countries; (ii) has not decreased over the last two decades; (iii) is more prevalent among the largest firms and for more differentiated products; (iv) is lower among retailers and wholesalers; (v) is also observed within almost perfectly homogenous product categories, which suggests that a non-negligible share of price discrimination is triggered by heterogeneous markups rather than quality or composition effects. We then estimate a rich statistical decomposition of the variance of prices to shed light on exporters' pricing strategies. |
| JEL: | F1 F14 F4 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26246&r=all |
| By: | Alex Chernoff; Patrick Alexander |
| Abstract: | We develop a model with firm heterogeneity in importing and cross-border shopping among consumers. Exchange-rate appreciations lower the cost of imported goods, but also lead to more cross-border shopping; hence, the net impact on aggregate retail prices and sales is ambiguous. Using Canadian firm-level data from 2002 to 2012, we find empirical support for several predictions of the model. We then estimate the model-implied exchange-rate elasticities of aggregate retail prices and sales. Our benchmark results indicate a deflationary effect of appreciations on retail prices and a small positive effect on sales. From 2002 to 2012, the Canadian exchange rate appreciated by 57%, which, according to our model, led to a 6.5% reduction in the retail price index. We also find that the estimated elasticities of aggregate retail prices and sales grew over this period, driven by import growth from China. This suggests that the transmission of exchange-rate movements to prices has grown since the early 2000s, which has consequences for the role of Canada’s flexible exchange rate regime in supporting inflation stability. |
| Keywords: | Exchange rates; International topics; Service Sector |
| JEL: | F10 F14 L81 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-34&r=all |
| By: | Ansgar Belke; Ulrich Volz |
| 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 deindustrialisation 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:rmn:wpaper:201908&r=all |
| By: | Youngjin Yun (Bank of Korea) |
| Abstract: | This paper investigates pattern changes in international capital flows after the Global Financial Crisis using the Korean case. It follows capital flows of Korea during the last couple of decades to characterize three significant changes after the crisis. First, after the introduction of macroprudential policies, the bank external borrowing was curbed while the bank external lending started an increasing trend. Second, the resident’s outward portfolio investments outpaced foreign portfolio investments on domestic assets after the crisis. The net outflow is closely associated with changes in return differentials between domestic and foreign assets. Third, the continued current account surpluses were saved as private assets held abroad, while it was saved as FX reserves before the crisis. The precautionary role of reserves is now complemented by currency swap arrangements with major countries. Simple VAR results confirm the increased resilience of the bank’s foreign borrowing to external shocks, and the increased association of net portfolio inflows with the interest rate differential after the crisis. |
| Keywords: | capital flows, capital flow management policy, macroprudential policy |
| JEL: | F32 G15 |
| Date: | 2019–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_028&r=all |
| By: | Kjetil Storesletten (Department of Economics, University of Oslo); Bo Zhao (National School of Development, Peking University); Fabrizio Zilibotti (Cowles Foundation, Yale University) |
| Abstract: | We document that the nature of business cycles evolves over the process of development and structural change. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, employment in agriculture declines while labor productivity increases in agriculture more than in other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The focal point of the theory is the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as modern agriculture crowds out traditional agriculture. Structural change accelerates in booms and slows down in recessions. We estimate the model and show that it accounts well for both the structural transformation and the business cycle fluctuations of China. |
| Keywords: | Agriculture, Business Cycle, Capital Accumulation, China, Employment, Lewis, Modernization, Structural Change |
| JEL: | E32 O11 O13 O14 O41 O47 O53 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2191&r=all |