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on Open Economy Macroeconomics |
| By: | Mark Aguiar (Federal Reserve Bank; Massachusetts Institute of Technology; National Bureau of Economic Research; University of Rochester; Graduate School of Business; Princeton University); Satyajit Chatterjee (National Bureau of Economic Research; Federal Reserve Bank of Philadelphia; Federal Reserve Bank); Harold L. Cole; Zachary Stangebye |
| Abstract: | We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap in time (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show that the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a “sudden stop” (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government’s incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the model, including such crises in-creases the default probabilities by a factor of five and the spread volatility by a factor of twenty-five. |
| Keywords: | self-fulfilling debt crises; rollover crises |
| JEL: | F1 G3 |
| Date: | 2020–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:87393&r=all |
| By: | Jongwanich, Juthathip (Thammasat University) |
| Abstract: | This paper examines the effectiveness of capital account policy in terms of its ability to affect the volume and composition of capital flows, relieve pressures on real exchange rates, and foster monetary policy independence. Ten emerging Asian economies are used as case studies to assess the effectiveness of capital account policy during 2000–2015. The results suggest that some types of capital controls are effective in reducing the volume of capital flows and pressure on real exchange rates. The choice of exchange rate regime matters in terms of the effectiveness of capital controls for fostering monetary policy independence. Although some types of capital controls are effective in creating macroeconomic stability, implementing capital account policy needs to be undertaken with caution. This is because substitution or complementarity among capital controls is evident, both within and across countries in the region. It seems that strong economic fundamentals are more important than capital account policy for changing the composition of capital inflows toward more stable and long-term flows. |
| Keywords: | capital flows; capital restrictions; emerging Asia |
| JEL: | F31 F32 O53 |
| Date: | 2019–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0578&r=all |
| By: | Rubene, Ieva; Colavecchio, Roberta |
| Abstract: | How long does it take for exchange rate changes to pass through into inflation? Does it make a difference whether the exchange rate depreciates or appreciates? Do relatively large exchange rate changes entail more exchange rate pass-through? In this paper, we examine possible non-linearities in the transmission of exchange rate movements to import and consumer prices in all 19 euro area countries as well as the euro area as a whole from 1997 to 2019Q1. We extend a standard single-equation linear framework with additional interaction terms to account for possible non-linearities and apply local projections to obtain state-dependent impulse response functions. We find that (i) euro area consumer and import prices respond significantly to exchange rate movements after one year, responding more when the exchange rate change is relatively large; and (ii) euro appreciations and depreciations affect the level of euro area exchange rate pass-through in a symmetric fashion; (iii) for euro area countries results differ for import and consumer prices and across countries. JEL Classification: E31, F41 |
| Keywords: | exchange rate pass-through, inflation, local projections, non-linearities |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202362&r=all |
| By: | Aizenman, Joshua (University of Southern California); Jinjarak, Yothin (Victoria University of Wellington); Nguyen, Hien Thi Kim (Victoria University of Wellington); Park, Donghyun (Asian Development Bank) |
| Abstract: | The paper compares fiscal cyclicality across regions and countries from 1960 to 2016. It finds that more than half of 170 countries analyzed in seven regions had, in more recent years, limited fiscal space, and that their fiscal policy was either cyclical or procyclical. This was particularly apparent since the 2008–2009 global financial crisis, which was marked by increased procyclical government spending when accounting for net acquisition of nonfinancial assets and capital expenditure. We construct a limited-fiscal-capacity statistic, measured by public debt–average tax revenue ratio and its volatility, which is found to be positively associated with fiscal procyclicality. The cyclicality is asymmetric: on average, a more indebted government (relative to the tax base) spends more in good times and cuts back spending indifferently compared with low-debt countries in bad times. Having sovereign wealth funds is also associated with larger countercyclicality. An enduring interest rate rise entails diminished fiscal space—a 10% increase in the public debt–tax base ratio is associated with an upper bound of a 5.6% increase in government-spending procyclicality. |
| Keywords: | cross-country analysis; fiscal cyclicality; public debt |
| JEL: | E02 E62 F40 |
| Date: | 2019–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0582&r=all |
| By: | Javier Andrés (Universidad de Valencia); Pablo Burriel (Banco de España); Wenyi Shen (Oklahoma State University) |
| Abstract: | In this paper we study fiscal policy effects and fiscal space for countries in a monetary union with different levels of public debt. We develop a dynamic stochastic general equilibrium (DSGE) model of a two-country monetary union, calibrated to match the characteristics of Spain and Germany, in which debt sustainability is endogenously determined a la Bi (2012) to shape the responses of the risk premium on public debt. Policy shocks change the market’s expectation about future primary surplus, producing a direct effect on the sovereign risk premium and macroeconomic responses of the economy. In normal times the costs of a government spending driven fiscal consolidation in the high-debt country are greatly diminished when this consolidation improves endogenously its debt sustainability prospects. Fiscal consolidations in both members of the monetary union decrease real interest rates and amplify the reduction in risk premium in the highly-indebted country, improving union-wide output in the long run, but at the cost of lower output in the low-debt country in the short term. On the contrary, when monetary policy is constrained at the zero lower bound, the risk premium channel arising from the endogenous determination of debt sustainability becomes muted. In the ZLB, a fiscal consolidation generates deflation expectations which increase the real interest rate and may compensate partially or completely, depending on the calibration, the benefits from a lower risk premium. In this context, a fiscal expansion in the low-debt country and a consolidation in the high-debt country delivers the greater positive impact on union-wide output. Finally, the risk premium channel only affects countries with medium or low levels of public debt indirectly through the negative spillovers from other high-debt members of the monetary union. |
| Keywords: | fiscal sustainability, sovereign debt default risk, monetary union |
| JEL: | E31 E62 H30 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2001&r=all |
| By: | Andriansyah, Andriansyah; Messinis, George |
| Abstract: | Purpose – The purpose of this paper is to develop a new framework to test the hypothesis that portfolio model predicts a negative correlation between stock prices and exchange rates in a trivariate transmission channel for foreign portfolio equity investment. Design/methodology/approach – This paper utilizes panel data for eight economies to extend the Dumitrescu and Hurlin (2012) Granger non-causality test of heterogeneous panels to a trivariate model by integrating the Toda and Yamamoto (1995) approach to Granger causality. Findings – The evidence suggests that stock prices Granger-cause exchange rates and portfolio equity flows Granger-cause exchange rates. However, the overall panel evidence casts doubt on the explicit trivariate model of portfolio balance model. The study shows that Indonesia may be the only case where stock prices affect exchange rates through portfolio equity flows. Research limitations/implications – The proposed test does not account for potential asymmetries or structural shifts associated with the crisis period. To isolate the impact of the Asian Financial crisis, this paper rather splits the sample period into two sub-periods: pre- and post-crises. The sample period and countries are also limited due to the use of the balance of payment statistics. Practical implications – The study casts doubt on the maintained hypothesis of a trivariate transmission channel, as posited by the portfolio model. Policy makers of an economy may integrate capital market and fiscal policies in order to maintain stable exchange rate. Originality/value – This paper integrates a portfolio equity inflow variable into a single framework with stock price and exchange rate variables. It extends the Dumitrescu and Hurlin’s (2012) bivariate stationary Granger non-causality test in heterogeneous panels to a trivariate setting in the framework of Toda and Yamamoto (1995). |
| Keywords: | Granger causality, Exchange rates, Stock prices, Heterogeneous panels, Portfolio equity |
| JEL: | F31 G14 G15 |
| Date: | 2019–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:97992&r=all |
| By: | Chul Chung (Henley Business School, University of Reading); Chris Brewster (Henley Business School, University of Reading); Ödül Bozkurt (University of Sussex Business School, UK) |
| Abstract: | This study examines the extent to which, and how, ‘best-practice’ global HRM policies are transferred by an emerging multinational enterprise (EMNE) across its subsidiaries. We focus on how socio-political dynamics unfold, identifying the role of national and subsidiary functionspecific institutional contexts, and managerial agency. We discuss substantial resistance to the importation of purported ‘global best practices’ by the subsidiaries and show that an EMNE’s ability to disseminate ‘global best practices’ across advanced as well as emerging economies is influenced by power dynamics between HQ and the subsidiaries, conditioned by the EMNE’s industry position, the home institutional context, national and subsidiary function-specific local institutional contexts, and local actors’ abilities to construct compelling localization logics that relate the distinct local contexts to significant business risk. |
| Keywords: | emerging multinational enterprise, global best practice, international HRM |
| JEL: | M12 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:jhdxdp:jhd-dp2019-02&r=all |