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on Open Economy Macroeconomics |
| By: | Luca Fornaro |
| Abstract: | Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation. |
| Keywords: | monetary union, international financial integration, exchange rates, optimal currency area, capital flights, euro area |
| JEL: | E44 E52 F33 F34 F36 F41 F45 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1138&r=all |
| By: | Liutang Gong (Peking University, Guanghua School of Management and LMEQF); Chan Wang (Central University of Finance and Economics, School of Finance); Heng-fu Zou (Central University of Finance and Economics, China Economics and Management Academy) |
| Abstract: | This paper examines optimal monetary policy rules in a model of vertical production and trade with reference currency. As evidenced by empirical findings, we assume that final-goods prices are sticky, but intermediategoods prices are flexible. We find that even if intermediate-goods prices are flexible, monetary authorities need to respond to the shocks at the stage of intermediate-goods production. We also find that, when a shock occurs at the stage of final-goods production, monetary responses are independent of the expenditure share of finalgoods producers on intermediate goods. For the first time in the literature, our model gives a condition under which both countries are willing to participate in monetary cooperation. Thus the gains from cooperation are real. In addition, we compare the volatility of the nominal exchange rate in Nash case with that in cooperative case, and compare the volatility of the nominal exchange rate in our model with that in a model without vertical production and trade as well. We also extend the model to consider a case of dual price stickiness. We find that the change in solution methods completely alters the conclusions of the model. |
| Keywords: | exchange rates, monetary cooperation, optimal monetary policy, reference-currency pricing, vertical production and trade |
| JEL: | E5 F3 F4 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:611&r=all |
| By: | Hamano, Masashige; Pappadà, Francesco |
| Abstract: | This paper revisits the case for exible vs. fixed exchange rate regime in a two-country model with firm heterogeneity and nominal wage rigidity under incomplete financial markets. Dampening nominal exchange rate fluctuations simultaneously stabilizes the firm turnover in the export market. When firms are homogeneous and low productive, the fixed exchange rate regime dominates the flexible one because it reduces the fluctuations in labor demand arising from entry and exit of exporters following a demand shock. We also show that an alternative regulation policy in the export market does not rule out the possible adoption of a managed floating regime. |
| JEL: | F32 F41 E40 |
| Date: | 2020–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2020_001&r=all |
| By: | Antonio M. Conti (Bank of Italy); Elisa Guglielminetti (Bank of Italy); Marianna Riggi (Bank of Italy) |
| Abstract: | We document that the feeble relation between wage growth and unemployment experienced by the euro area since the Global Financial Crisis has been coupled with a change in the response of labour productivity (output per worker) to an increase in employment, from nil up to 2009 (acyclical) to negative since then (countercyclical). We argue that both facts can be explained by the strong persistence of the last recession and of the subsequent recovery. The relevance of the duration of the cyclical phase can be rationalized in a theoretical model where firms use both the extensive and intensive margin of labour and face employment adjustment costs. When demand shocks are persistent firms adjust relatively more the extensive margin, leading to a countercyclical response of labour productivity and only to a small reaction of wages. We take the model to the data using a Bayesian VAR, where persistent demand shocks are identified exploiting the theoretical prediction which associates them with a countercyclical profile of labour productivity. We show that persistent demand shocks (i) induce a lower reaction of wages to employment and (ii) have been a non negligible driver of employment and wage dynamics in the aftermath of the Global Financial Crisis. |
| Keywords: | missing wage growth, productivity, demand shocks, Bayesian VAR models, DSGE models. |
| JEL: | C32 E32 F34 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1257_19&r=all |
| By: | Hiro Ito; Robert N McCauley |
| Abstract: | This paper analyses the factors that govern the choice of the currency composition of official foreign exchange reserves. First, we introduce a new panel dataset on the key currencies in foreign exchange reserves of about 60 economies in the 1999-2017 period. Second, we show that the currency composition of reserves relates strongly to the co-movement of the domestic currency with key currencies and the currency invoicing of trade. These factors represent attributes of the dollar or the euro rather than of the United States or the euro area. They exert about equal effects on the currency composition of foreign exchange reserves. We demonstrate that these findings are robust to a host of other possible factors. |
| Keywords: | foreign exchange reserves, international currency, key currency, currency zones, invoicing of trade, currency of international debt, foreign exchange reserve management |
| JEL: | E44 E58 F14 F31 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:828&r=all |
| By: | Hickey, Rónán (Central Bank of Ireland); Lozej, Matija (Central Bank of Ireland); Smyth, Diarmaid (Department of Finance) |
| Abstract: | Expenditure reductions played a key role in many small open economies during the fiscal consolidation between 2008 to 2013, especially for public investment. This led to lower public capital stock and affected competitiveness of these countries. After the crisis, many governments consider increasing government investment to replenish the public capital stock, but have limited resources to do so. This paper shows that budget-neutral investment spending can generate the long-term benefits of a higher public capital stock while at the same time limiting the risks of overheating and negative consequences for public finances and trade balance. The least harmful way of financing government investment, which preserves both fiscal and external balances, is by reducing other government spending, even if it is valued by households. Financing government investment with debt worsens fiscal and external balances. Financing investment with labour taxes reduces the external balance, while financing with VAT only does so in the very short run. |
| Keywords: | DSGE models, government investment, public finances, monetary union, open-economy macroeconomics. |
| JEL: | F16 F41 F42 F45 F47 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:9/rt/19&r=all |
| By: | Carrera, César (Banco Central de Reserva del Perú) |
| Abstract: | El mecanismo de transmisión entre el consumo y sus fundamentos ha sido revisado en la literatura desde la hipótesis del ingreso permanente de Friedman hasta las restricciones de liquidez de los hogares. Un ángulo particular para explicar el consumo se centra en el papel de las expectativas del consumidor como determinante del gasto de consumo. Aquí se explora medidas alternativas para las expectativas de los consumidores (capturadas por encuestas a hogares) teniendo en cuenta las expectativas de los gerentes generales y utilizando importaciones de bienes de consumo duraderos (que capturan la confianza del consumidor sobre las condiciones económicas futuras). Se argumenta que, para una economía pequeña y abierta, el canal de expectativas está bien capturado por las medidas alternativas. También se encuentra que, aunque hay un traspaso de las expectativas al consumo, este efecto tiende a ser de corta duración. Además, se reporta aquellos valores y períodos de tiempo para los cuales las medidas de expectativa alternativas tienen un impacto significativo en el consumo. |
| Keywords: | Consumption, Durable goods, Business expectations, Households expectations. |
| JEL: | C16 F31 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2019-008&r=all |
| By: | Aiswarya Thomas (INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH,) |
| Abstract: | Though a highly debated and contested idea, the open economy trilemma started to gain significant attention recently after Rey?s argument that; in an open economy setting there is no trilemma but only a dilemma between two choices: capital mobility and independent monetary policy. In other words, Rey concludes that exchange rate regimes do not play any role in deciding between capital mobility and independent monetary policy. Further, a lot of studies have come up which largely discuss about the monetary policy independence in countries that allow free mobility of capital flows, by making comparisons between countries with fixed exchange rate regime and floating exchange rate regime. However, the studies on monetary policy independence of countries with managed floating exchange rate regimes are very scant. Given this context, it becomes quite imperative to undertake a study on the monetary policy independence in India for the fact that India is a unique case in itself with not complete free mobility of capital and a managed float exchange rate regime. . Therefore, this paper employed the auto regressive distributed lag (ARDL) approach to study the monetary policy independence in India. The results of the study reveal that the Indian monetary policy stance is highly integrated with the US and the European Union monetary policy stance. |
| Keywords: | Mundell's trilemma, Monetary policy Independence, Financial Integration, Globalization |
| JEL: | F41 E52 E58 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:9711792&r=all |
| By: | Andrejs Zlobins (Bank of Latvia) |
| Abstract: | This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) expanded asset purchase programme (APP) on Latvia and other euro area countries and investigates the cross-border transmission mechanism. To that end, we employ two different vector autoregressive (VAR) models often used to evaluate the spillovers stemming from the monetary policy actions, namely a bilateral structural VAR with block exogeneity (BSVAR-BE) and a multi-country mixed cross-section global VAR with stochastic volatility (MCS-BGVAR-SV), both estimated using Bayesian techniques. We find that the APP had a limited and weakly significant impact on Latvia's output and that most of the effect was generated by spillovers from other countries. However, we provide evidence that the APP had a robust impact on Latvian inflation due to depreciation of the euro. Regarding other jurisdictions, our results suggest that the ECB's asset purchases had a larger impact on industrial production in the countries where the portfolio rebalancing channel was activated. Despite that, our evidence suggests that the APP was mainly transmitted to inflation via exchange rate depreciation rather than through aggregate demand-driven shifts in the Phillips curve. |
| Keywords: | expanded asset purchase programme, quantitative easing, euro area, GVAR, SVAR, Bayesian estimation |
| JEL: | C54 E47 E58 F42 |
| Date: | 2019–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201902&r=all |
| By: | Yixiao ZHOU (Crawford School of Public Policy, Australian National University); Rod TYERS (Business School, University of Western Australia; Research School of Economics and Centre for Applied Macroeconomic Analysis (CAMA), Australian National University) |
| Abstract: | Relative wages and the share of total value added accruing to low-skill workers have declined during the past three decades, among both OECD countries and large developing countries. The primary beneficiary until recently has been skill, the supply of which has risen as education investment has increased. The rise in artificial intelligence (AI)-driven automation suggests that declines in value added shares accruing to low-skill workers will continue. Indeed, AI-driven automation creates an impulse for diminished labor market performance by low-skill workers throughout the world but most prominently in high-fertility, relatively youthful regions with comparatively strong growth in low-skill labor forces. The implied bias against such regions will therefore enhance emigration pressure. This paper offers a preliminary analysis of these effects. Central to the paper is a model of the global economy that includes general demography and real wage sensitive bilateral migration behavior, which is used to help quantify potential future growth in real wage disparities and the extent, direction and content of associated migration flows. Overall, global wage inequality is increased by expanded skilled migration, primarily because of large increases in skilled wage premia that arise in developing regions of origin. Inter-regional divergences in skilled wages are reduced, however, due to the additional skilled labour market arbitrage opportunities offered by more open migration policies. |
| Keywords: | Automation, demographic change, migration incentives, labor markets and economic growth |
| JEL: | C68 E22 E27 F21 F43 J11 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:19-19&r=all |
| By: | Sy-Hoa Ho; Jamel Saadaoui |
| Abstract: | This empirical investigation aims at exploring the determinants of money demand in Vietnam by using both linear and nonlinear autoregressive distributed lags models over the period spanning from the third quarter of 2000 to the first quarter of 2018. Our findings can be summarized as follows: firstly, when the shock is symmetric (i.e. a permanent nominal appreciation of one percent), the money demand increases by 3.7 percent in the long term. Secondly, when the shock is asymmetric, for a permanent nominal appreciation of one percent, we observe an increase of 15.6 percent in the money demand. Whereas, for a permanent nominal depreciation of one percent, we observe a decrease of 7.4 percent in the money demand. These results are consistent with symmetry tests and lead us to think that asymmetries occur mainly in the short run and are transmitted to the long run. |
| Keywords: | Money Demand, Exchange Rate, ARDL models, NARDL models, Dollarization. |
| JEL: | C22 E41 F31 F33 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2019-49&r=all |