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on Open Economy Macroeconomics |
| By: | Novy, Dennis; Chen, Natalie; Chung, Wanyu |
| Abstract: | Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of transactions in our sample invoiced in neither sterling nor the exporter's currency. We then study the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-thanexpected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices. |
| Keywords: | CPI; dollar; euro; exchange rate pass-through; inflation; invoicing; sterling; UK; vehicle currency pricing |
| JEL: | F14 F31 F41 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:102748&r=all |
| By: | Klein, Mathias (Research Department, Central Bank of Sweden); Linnemann, Ludger (TU Dortmund University) |
| Abstract: | We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks. |
| Keywords: | Tax policy; government spending; proxy-vector autoregressions; current account; twin deficits |
| JEL: | E32 E62 F41 |
| Date: | 2019–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0377&r=all |
| By: | Mario Alloza (Banco de España); Jesús Gonzalo (Universidad Carlos III de Madrid); Carlos Sanz (Banco de España) |
| Abstract: | We show that several shocks identified without restrictions from a model, and frequently used in the empirical literature, display some persistence. We demonstrate that the two leading methods to recover impulse responses to shocks (moving average representations and local projections) treat persistence differently, hence identifying different objects. In particular, standard local projections identify responses that include an effect due to the persistence of the shock, while moving average representations implicitly account for it. We propose methods to re-establish the equivalence between local projections and moving average representations. In particular, the inclusion of leads of the shock in local projections allows to control for its persistence and renders the resulting responses equivalent to those associated to counterfactual non-serially correlated shocks. We apply this method to well-known empirical work on fiscal and monetary policy and find that accounting for persistence has a sizable impact on the estimates of dynamic effects. |
| Keywords: | impulse response function, local projection, shock, fiscal policy, monetary policy |
| JEL: | C32 E32 E52 E62 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1944&r=all |
| By: | Aghababaei, Mohammad Ebrahim |
| Abstract: | This study investigates the sensitivity of macro and sectoral variables to natural resource revenues in a resource-abundant developing country. Here, different transmission mechanisms are in effect. The paper considers the exchange rate channel, financial sector channel, capital flow channel, public sector channel, and resource reallocation channel. I employ a large scale real-financial general equilibrium model with especial focus on fossil fuel energy, natural resources, financial sector interactions, inter-sectoral linkages, and public sector responses. The model is used to predict the likely changes in oil and gas exports in Iran. It causes more oil exports but at lower international prices. Our comparative static analysis indicates that resource elasticity for GDP is from +0.10 to +0.13; for public services is from +0.16 to +0.27; for import is from +0.42 to +0.45; for mineral extraction is from -0.50 to -0.10, and for the manufacturing sector is from -0.08 to -0.06. The simulation reveals extraction competition among natural resources. |
| Keywords: | General equilibrium, natural resources, Dutch Disease, trade, non-tariff barriers |
| JEL: | C68 F11 O13 O24 Q33 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:97851&r=all |
| By: | Hans Gersbach (ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)); Jean-Charles Rochet (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB)); Martin Scheffel (Karlsruhe Institute of Technology) |
| Abstract: | We integrate bank and bond financing into a two-sector neoclassical growth model to examine the stabilization effect of endogenous bank leverage adjustment. We show that although bank leverage amplifies shocks, the increase of leverage to a decline in bank equity is an automatic stabilizer in downturns, since it partially offsets the decline of bank lending to financially constrained firms. Regulatory capital limits and wage rigidities impair the re-allocation of capital between sectors and weaken the automatic stabilization channel. A quantitative analysis of the US in the Great Recession shows that the magnitude of automatic stabilization is significant and informs about potentially high costs of strict capital regulation or wage rigidities in banking crises. |
| Keywords: | financial intermediation, capital accumulation, banking crises, macroeconomic shocks, business cycles, bust-boom cycles, managing recoveries |
| JEL: | E21 E32 F44 G21 G28 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1962&r=all |
| By: | Okan Eren; Gulnihal Tuzun |
| Abstract: | We estimate the impact of the domestic and trade partners’ business cycles on the current account balance of Turkey and build a cyclically-adjusted current account balance from 2003Q1 to 2019Q1. To this end, we adopt a methodology that is based on the estimation of domestic and foreign business cycles by a modified version of HP filter and the approximation of their impact on the goods and services trade balances, separately. Our findings suggest that the level and evolution of the current account balance are mainly determined by non-cyclical factors although the size of cyclical adjustment reaches up to 1.4 percent of GDP in certain periods. The domestic business cycles seem to be the main driver of the cyclical changes in the current account balance throughout the period of analysis. Furthermore, the cyclical adjustment is more pronounced in the goods trade balance than the services trade balance. Foreign business cycles have a much bigger effect on the services trade balance than the goods trade balance when compared to the impact of domestic business cycles. Finally, the incorporation of price cycles into the analysis points out that the final cyclically-adjusted current account balance turns out to be more positive in recent periods unlike the case in which only the business cycles are taken into account. |
| Keywords: | Current Account Balance, Cyclical Adjustment, Business Cycles |
| JEL: | E32 F14 F32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1934&r=all |
| By: | Alessandro Rebucci; Chang Ma |
| Abstract: | This paper reviews selected post-Global Financial Crisis theoretical and empirical contributions on capital controls and identifies three theoretical motives for the use of this policy tools: pecuniary externalities in models of financial crises, aggregate demand externalities in new-Keynesian models of the business cycle, and terms of trade manipulation in open economy models with pricing power. Pecuniary and demand externalities offer the most compelling case for the adoption of capital controls, but macroprudential policy can also address the same distortion. So, in general, capital controls are not the only instrument that can do the job. If evaluated through the lenses of the new theories, the empirical evidence reviewed suggests that capital controls can have the intended effects, even though the extant literature is inconclusive as to whether the effects documented amount to a net gain or loss for the economies that adopted these policies. Terms of trade manipulation also provides a clear cut theoretical case for the use of capital controls, but this motive is less compelling because of the spillover and coordination issues inherent with the use of control on capital flows for this purpose. |
| JEL: | F38 F41 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26558&r=all |
| By: | Hui Tong; Shang-Jin Wei |
| Abstract: | A country may adopt policy measures such as raising its foreign exchange reserves to better prepare for foreign interest rate shocks or sudden reversal of international capital flows, which in principle should reduce financial vulnerability for its firms and the entire economy, but the beneficial effect of such policies may be partially offset by endogenous firms’ decisions to take on more risks. We present a robust but previously undocumented relationship between corporate leverage and country-level foreign exchange reserve holdings. For 6610 non-financial firms in 23 emerging markets from 2000 to 2006, we show that more foreign reserve accumulation leads to higher corporate leverage. While the reserve accumulation can reduce macroeconomic uncertainty, the increase in corporate leverage is also significantly greater in sectors that are intrinsically more sensitive to policy uncertainty. We go from correlation to causality via a two-prong instrumental variable strategy: simultaneously (1) instrumenting FX reserves by global commodity price movement, and (2) examining leverage of firms outside the commodity-sensitive sectors. |
| JEL: | F3 G3 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26545&r=all |
| By: | Aleksei Kiselev (Bank of Russia, Russian Federation); Aleksandra Zhivaykina (Bank of Russia, Russian Federation) |
| Abstract: | In this paper we investigate the impact of global relative price changes on domestic inflation. We use a dynamic hierarchical factor model (DHFM) to decompose consumer basket products’ inflation in a panel of countries into (i) a global factor, common to all price series and all countries, (ii) a price change shock at product group level, (iii) a price change shock at product subgroup level, and (iv) an idiosyncratic component. Using monthly data for 29 economies from 2003 to 2018 we find that product inflation rates demonstrate different sensitivity to common price shocks. For energy, some food and manufactured goods, global relative price changes may account for up to 49% of inflation variation which is quite high for this frequency and level of disaggregation. Moreover, common factors from the DHFM have significant explanatory power for overall CPI and its aggregate components across different countries. |
| Keywords: | Dynamic hierarchical factor model, global inflation, relative prices, Russia |
| JEL: | C38 E31 F42 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps53&r=all |