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on Open Economy Macroeconomics |
| By: | Maurice Obstfeld |
| Abstract: | Fifty years ago, Harry G. Johnson published “The Case for Flexible Exchange Rates, 1969,” its title echoing Milton Friedman’s classic essay of the early 1950s. Though somewhat forgotten today, Johnson’s reprise was an important element in the late 1960s debate over the future of the international monetary system. The present paper has three objectives. The first is to lay out the historical context in which Johnson’s “Case” was written and read. The second is to examine Johnson’s main points and see how they stand up to nearly five decades of experience with floating exchange rates since the end of the Bretton Woods system. The third is to review the most recent academic critiques of exchange-rate flexibility and ask how fatal they are to Johnson’s basic argument. I conclude that the essential case for exchange rate flexibility still stands strong. |
| JEL: | F31 F33 F41 F42 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26874&r=all |
| By: | M. Ayhan Kose (World Bank; Brookings Institution; CEPR; and CAMA); Peter S. O. Nagle (World Bank); Franziska Ohnsorge (World Bank; CEPR; and CAMA); Naotaka Sugawara (World Bank) |
| Abstract: | Episodes of debt accumulation have been a recurrent feature of the global economy over the past fifty years. Since 2010, emerging and developing economies have experienced another wave of historically large and rapid debt accumulation. Similar past debt buildups have often ended in widespread financial crises in these economies. This paper examines the factors that are likely to determine the outcome of the most recent debt wave, and considers policy options to help reduce the likelihood that it ends again in widespread crises. It reports two main results. First, the rapid increase in debt has made emerging and developing economies more vulnerable to shifts in market sentiment, notwithstanding historically low global interest rates. Second, policy options are available to lower the likelihood of financial crises, and to help manage the adverse impacts of crises when they do occur. These include sound debt management, strong monetary and fiscal frameworks, and robust bank supervision and regulation. The post-crisis debt buildup has coincided with a period of subdued growth as well as the emergence of non-traditional creditors. As a result, policy priorities also need to ensure that debt is spent on productive purposes to improve growth prospects and that all debt-related transactions are transparently reported. |
| Keywords: | Financial crises; currency crises; debt crises; banking crises; public debt; private debt; external debt. |
| JEL: | E32 E62 F34 G01 H12 H63 N20 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2008&r=all |
| By: | Òscar Jordà; Sanjay R. Singh; Alan M. Taylor |
| Abstract: | How do major pandemics affect economic activity in the medium to longer term? Is it consistent with what economic theory prescribes? Since these are rare events, historical evidence over many centuries is required. We study rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. In addition, we include major armed conflicts resulting in a similarly large death toll. Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In contrast, we find that wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. Using more sparse data, we find real wages somewhat elevated following pandemics. The findings are consistent with pandemics inducing labor scarcity and/or a shift to greater precautionary savings. |
| Keywords: | depressions; natural rate; local projections; wars; real interest rate; pandemics; COVID-19 |
| JEL: | E43 F41 N10 N30 N40 |
| Date: | 2020–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:87696&r=all |
| By: | Joshua AIZENMAN; ITO Hiroyuki |
| Abstract: | This paper investigates the political-economy trilemma: policy makers face a trade-off of choosing two out of three policy goals or governance styles, namely, (hyper-)globalization, national sovereignty, and democracy. We develop a set of indexes that measure the extent of attainment of the three factors for 139 countries in the period of 1975-2016. Using these indexes, we examine the validity of the hypothesis of the political-economy trilemma by testing whether the three trilemma variables are linearly related. We find that, for industrialized countries, there is a linear relationship between globalization and national sovereignty (i.e., a dilemma), and that for developing countries, all three indexes are linearly correlated (i.e., a trilemma). We also investigate whether and how three political-economic factors affect the degree of political and financial stability. The results indicate that more democratic industrialized countries tend to experience more political instability, while developing countries tend to be able to stabilize their politics if they are more democratic. The lower level of national sovereignty an industrialized country attains, the more stable its political situation tends to be, while a higher level of sovereignty helps a developing country to stabilize its politics. Globalization brings about political stability for both groups of countries. Furthermore, more globalized countries, whether industrial or developing, tend to experience more financial stability. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:20018&r=all |
| By: | Digvijay S. Negi (Indira Gandhi Institute of Development Research); Bharat Ramaswami (Ashoka University) |
| Abstract: | It is claimed that the world food supplies are more stable than the domestic supplies, and therefore free trade should achieve a higher degree of stability in prices and consumption than autarkic policies. The risk sharing implicit in such an argument, has, however never been formally examined. In this paper, we study the patterns of risk sharing in the global markets of rice, wheat and maize, and quantify the contribution of trade and stocks towards risk sharing. We adopt the predictions of the efficient risk sharing hypothesis as a benchmark and generalize the canonical single composite good model. While the data rejects the efficient risk sharing hypothesis, the wheat market is closest to the efficient risk sharing allocation. Trade is more important than storage in smoothing domestic production shocks. Further, we find that the degree of risk sharing is positively associated with income levels of the countries. |
| Keywords: | food markets, risk sharing, international trade, supply shocks |
| JEL: | F14 Q17 D52 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2020-002&r=all |
| By: | Krustev, Georgi; Casalis, André |
| Abstract: | We study the cyclical dynamics of consumption in the euro area (EA) and the large EA countries by distinguishing durable from nondurable expenditures. We adopt a theoretical partial equilibrium framework to justify the identification strategy of our empirical model, a time-varying parameter structural vector autoregression (TVP-SVAR). Following the main insight from the theoretical model, that liquidity constraints induce important interactions between durables and nondurables, we distinguish durable-specific demand and supply shocks, while taking into account monetary and credit conditions. Our main findings are: (i) durables react faster and more strongly than nondurables after monetary shocks in the euro area and in the largest EA countries, a confirmation of an outcome commonly reported for the US; (ii) there is a large degree of cross-country heterogeneity in how different factors (including durable-specific ones) explain consumption; (iii) the strength of spillovers from durable to nondurable consumption, as predicted by theory, is empirically correlated with how much households across countries are likely to be liquidity constrained. JEL Classification: C11, C32, D11, E21, E32 |
| Keywords: | consumption, durable goods, sign restrictions, SVARs |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202386&r=all |
| By: | Perekunah B. Eregha (Pan-Atlantic University, Lekki-Lagos. Nigeria) |
| Abstract: | This study examines the effect of exchange rate regimes on Foreign Direct Investment (FDI) flow for WAMZ. The Arellano Panel Correction for Serial Correlation and Heteroskedaticity option of the Within Estimator for fixed effect panel data model as well as the Dynamic Panel Data Instrumental Variable Approach by Anderson and Hsiao (1981) for the countries selected based on data availability for the period 1980-2016 were used. The fixed exchange rate regime was found to hamper FDI flow in the zone while intermediate policy had a significantly positive effect in facilitating FDI flow during periods of declining foreign reserves and narrowing current account balance in WAMZ. This implies that the transmission of the effect of exchange rate regimes on FDI inflows depends on the positions of the foreign reserves and current account balance in the zone. Consequently, the fixed regime is not a good policy in periods of narrowing current account balance and depleting foreign exchange reserves. The study therefore recommends the need for monetary authorities to be cautious in managing their exchange rates especially in periods of depleting foreign reserves and narrowing current account so as not to deter the much needed FDI inflow. |
| Keywords: | Exchange Rate Regimes; Inflationary Expectation; Exchange rate uncertainty; Foreign Direct Investment Flow; Panel Data Analysis |
| JEL: | E31 F21 F31 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:19/069&r=all |
| By: | Krittika Banerjee (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | Equilibrium real exchange rates (ERERs) of a set of major emerging market economies (EMEs) are estimated in a panel cointegrating equation framework against trade weighted advanced economy (AE) currencies taking into account structural emerging market issues, and then used to derive misalignments of the RER. Since US as a dominant economy has considerable effect on EME monetary policy, we use weighted AE variables in order to avoid endogeneity when US data alone is used. We find robust support for the Balassa-Samuelson effect, whereby productivity appreciates RER. This is also seen to be a dominant factor, along with financial development. We find that dependency ratio appreciates ERER indicating excess demand possibly from increase in young dependent population, as well as future growth potential for these EMEs. Rise in fiscal expenditure and financial development, on average, have a depreciatory effect indicating improvements in long run supply conditions. Institutions are found to improve competitiveness in all EMEs in our sample, except Thailand. On average, Asian economies have more appreciated ERER indicating better fundamentals. Over 1995-2017 we find that EME RER followed a cyclical pattern closely linked to global events, with periods of appreciation followed by depreciation. Asian economies along with Brazil and Mexico can be grouped together in terms of RER movement. Russia and Turkey have edged on the side of under-valuation and followed a more random path. The absence of substantial prolonged under-valuation before the Global Financial Crisis implies it was not a sole cause of imbalances. Over-valuation indicates EMEs bore large post-crisis adjustment costs. |
| Keywords: | Real exchange rate, fundamentals, emerging markets, misalignments, global imbalances, adjustment costs |
| JEL: | C21 C22 C23 F31 F41 O5 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2020-001&r=all |
| By: | Kishi, Akio; Kono, Tatsuhito |
| Abstract: | Concentration or dispersion of retail stores is the result of market interactions. If it involves market failures, then the spatial location equilibrium of retail stores is not optimal in terms of social welfare. We investigate two important market failures involving retail store location: “monopolistic competition among retail stores” and “shopping externality caused by multipurpose shopping”. Retail store locations in market equilibrium and those in a social optimum are derived. Next, we show that the degree of hollowing-out of urban centers is not always excessive from the perspective of the social optimum. It is believed that hollowing-out of urban commercial centers harms social welfare. But on the contrary, if the accessibility of suburban areas from residential areas is lower than that of the urban center, we confirm that hollowing-out of urban commercial centers is desirable. In this case, promotion of retail stores’ location in urban center, such as subsidies to locate in the city center or restrictions on location in suburbs, decreases social welfare. Instead, promotion of stores’ location in the suburbs is preferred. |
| Keywords: | monopolistic competition, hollowing-out, suburbanization, shopping externality |
| JEL: | L11 L13 R12 R32 |
| Date: | 2020–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99247&r=all |
| By: | Olatunji A. Shobande (Business School, University of Aberdeen, UK); Oladimeji T. Shodipe (Eastern Illinois University, US); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | The study examines the role of global predictors on national monetary policy formation for Kenya and Ghana within the New Keynesian DSGE framework. We developed and automatically calibrated our DSGE model using the Bayesian estimator, which made our model robust to rigorous stochastic number of subjective choices. Our simulation result indicates that global factors account for the inability of national Central Banks to predict the behaviour of macroeconomic and financial variables among these developing nations. |
| Keywords: | Business Cycle, Macroeconomic policy, Financial crises |
| JEL: | E32 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:19/066&r=all |
| By: | Giancarlo Corsetti (University of Cambridge and CEPR (E-mail: gc422@cam.ac.uk)); Luca Dedola (European Central Bank and CEPR); Sylvain Leduc (Federal Reserve Bank of San Francisco) |
| Abstract: | How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete-implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness. |
| Keywords: | Currency misalignments, trade imbalances, asset markets and risk sharing, optimal targeting rules, international policy cooperation, exchange rate pass-through |
| JEL: | E44 E52 E61 F41 F42 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:20-e-04&r=all |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Akhilesh K. Verma (Indira Gandhi Institute of Development Research) |
| Abstract: | We present a small open economy New Keynesian model with financial intermediation to investigate the interaction between monetary policy and macroprudential regulations. Our model economy attempts to capture the vulnerability of emerging market economies in the face of external and domestic shocks. We build a model that closely captures the dynamics of emerging market economies to show that interest rate policy rules alone may not be an effective instrument to stabilize the economy under negative shocks. Monetary policy implementation through augmented Taylor rule (ATR) is an inadequate tool to absorb negative shocks given its conflict between inflation and exchange rate objectives. We show that the use of macroprudential regulations (MaPs) with simple Taylor rule improves business cycle dynamics relative to ATR under domestic and external shocks. We present two kinds of MaP regulations to show that they effectively mitigate losses during economic downturns and reduce excessive risk-taking behavior during economic booms when used along with a simple monetary policy rule (MP). In addition, we also conduct welfare evaluation that supports complementarity between MP and MaPs under different shocks. |
| Keywords: | DSGE model, cross border flows, monetary policy macroprudential regulation |
| JEL: | E44 E52 E61 F42 G28 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2020-008&r=all |
| By: | Simplice A. Asongu (Yaoundé/Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria) |
| Abstract: | The EMU crisis holds special lessons for existing monetary unions. We assess the behavior of real effective exchange rates (REERs) of members of the Central African Economic and Monetary Community (CEMAC) zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected associations with the exchange rate fluctuations. The analysis also reveals that only the REER adjustments of Cameroon and Gabon are significant in restoring the long-term equilibrium in event of a shock. The Cameroonian economic fundamentals of terms of trade, government expenditure and openness have different long-term relations with the REER in comparison to those of other member states. There is no need for an adjustment in the level of the peg based on the present quantitative analysis of REER paths. |
| Keywords: | Exchange rate; Macroeconomic impact; CEMAC zone |
| JEL: | F31 F33 F42 F61 O55 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:19/071&r=all |
| By: | Cao, Dan; Evans, Martin; Lua, Wenlan |
| Abstract: | We examine how medium-term movements in real exchange rates and GDP vary with international financial conditions. For this purpose, we study the international transmission of productivity shocks across a variety of IRBC models that incorporate different assumptions about the persistence of productivity shocks, the degree of international risk sharing and access to international asset markets. Using a new global solution method, we demonstrate that the transmission of productivity shocks depends critically on the proximity of a national economy to its international borrowing limit. We then show that this implication of the IRBC model is consistent with the behavior of the US-UK real exchange rate and GDP over the past 200 years. The model also produces a negative correlation between relative consumption growth and real depreciation rate consistent with more recent data, and hence offers a resolution of the Backus-Smith puzzle. |
| Keywords: | Real Exchange Rates, International Real Business Cycles, Global Solution Methods |
| JEL: | C60 F30 F31 F41 F44 G11 |
| Date: | 2020–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99054&r=all |
| By: | Parsley, David; Popper, Helen |
| Abstract: | We examine state GDP comovement and consumption risk-sharing channels within the United States as a whole, and among states whose populations have voted consistently Democrat (Blue) or Republican (Red) in national elections. We document three facts: (1) state GDP growth is asynchronous, and Blue and Red states are particularly out of sync; (2) at the same time, interstate consumption risk-sharing is very high{it is high even across the political divide, and it is high even where the role of fiscal flows is minimal; and (3) the channels of risk sharing across Blue, Red, and Swing states are quite different. |
| Keywords: | monetary Union, consumption risk-sharing, economic and political divergence, optimal currency area |
| JEL: | F20 F33 F4 F42 F45 |
| Date: | 2019–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98981&r=all |