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on Open Economy Macroeconomics |
| By: | Zhai, Weiyang; Yoshida, Yushi |
| Abstract: | Understanding what drives the changes in current accounts is one of the most important macroeconomic issues for developing countries. Excessive surpluses in current accounts can trigger trade wars, and excessive deficits in current accounts can, on the other hand, induce currency crises. The Glick-Rogoff (1995, Journal of Monetary Economics) model, which emphasizes productivity shocks at home and in the world, fit well with developed economies in the 1970s and 1980s. However, the Glick-Rogoff model fits poorly when it is applied to fast-growing BRICS countries for the period including the global financial crisis. We conclude that different mechanisms of current accounts work for developed and developing countries. |
| Keywords: | BRICS Countries; Current Accounts; Glick-Rogoff Model; Global Financial Crisis; Productivity Shock |
| JEL: | F32 F41 |
| Date: | 2020–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99446&r=all |
| By: | Ortega, Eva; Osbat, Chiara |
| Keywords: | consumer prices, euro area, exchange rates, import prices, inflation, monetary policy, pass-through |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2020241&r=all |
| By: | Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri |
| Abstract: | The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages. |
| Keywords: | Monetary policy cooperation; Global imbalances; Open-loop Nash games |
| JEL: | E44 E61 F42 |
| Date: | 2020–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1271&r=all |
| By: | David Cook; Nikhil Patel |
| Abstract: | Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction. |
| Keywords: | dollar invoicing, exchange rates, monetary policy, global value chains |
| JEL: | E2 E5 E6 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:860&r=all |
| By: | Boris Fisera (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic; Slovak Academy of Science, Stefanikova 49, 814 38, Bratislava, Slovak Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic) |
| Abstract: | We evaluate the effect of exchange rate misalignments on the balance of trade and the role that global value chain participation plays in this effect for 11 new European Union member states. Using heterogeneous panel cointegration methods, we first estimate the real equilibrium exchange rate and detect episodes of currency misalignment. We find asymmetric effects of real currency misalignments: overvaluation has a negative effect, but undervaluation has no effect on the trade balance. Additionally, we find that global value chain participation weakens the effect of currency misalignments on the balance of trade. Therefore, our results suggest that globalization reduces the role of exchange rates in stimulating the domestic economy. |
| Keywords: | Balance of trade, exchange rates, global value chains, export sophistication, panel cointegration |
| JEL: | F31 F32 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2020_10&r=all |
| By: | Jorge Carrera; Blaise Gnimassoun; Valérie Mignon; Romain Restout |
| Abstract: | This paper conducts an in-depth empirical investigation on the impact of the exchange rate regime (ERR) on real currency misalignments in a panel of 17 Latin American countries over the 1970-2016 period. We consider explicitly the two dimensions of misalignments, size and persistence, and evaluate four different ERR classifications. We also pay attention to cross-sectional dependencies across countries that appear to be important in Latin America, and provide several robustness checks. Our main findings show that, although fixed ERR perform well in limiting the size of misalignments—and in reducing inflation and fiscal deficit—the disequilibria are more persistent. On the contrary, allowing for more flexibility reduces persistence but increases the size of misalignments. Overall, we show that Latin American countries face a crucial trade-off when they have to choose their ERR. |
| Keywords: | Latin American countries; Exchange rate regimes; Currency misalignments. |
| JEL: | F31 C23 E42 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2020-17&r=all |
| By: | Valérie Mignon; Jorge Carrera; Blaise Gnimassoun; Romain Restout |
| Abstract: | This paper conducts an in-depth empirical investigation on the impact of the exchange rate regime (ERR) on real currency misalignments in a panel of 17 Latin American countries over the 1970-2016 period. We consider explicitly the two dimensions of misalignments, size and persistence, and evaluate four different ERR classifications. We also pay attention to cross-sectional dependencies across countries that appear to be important in Latin America, and provide several robustness checks. Our main findings show that, although fixed ERR perform well in limiting the size of misalignments—and in reducing inflation and fiscal deficit—the disequilibria are more persistent. On the contrary, allowing for more flexibility reduces persistence but increases the size of misalignments. Overall, we show that Latin American countries face a crucial trade-off when they have to choose their ERR. |
| Keywords: | Latin American countries; Exchange rate regimes; Currency misalignments |
| JEL: | F31 C23 E42 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2020-9&r=all |
| By: | Leonor Modesto (UCP, Catolica Lisbon School of Business and Economics & IZA); Carine Nourry (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE); Thomas Seegmuller (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE); Alain Venditti (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE & EDHEC Business School) |
| Abstract: | The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt hold by domestic households is high enough, global indeterminacy does not occur. |
| Keywords: | small open economy, public debt, credit constraint, indeterminacy |
| JEL: | E32 F43 H63 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2012&r=all |
| By: | Belke, Ansgar; Gros, Daniel |
| Abstract: | There is a symmetrical debate in two Euro area core countries: in France about the restrictive fiscal policy of Germany, leading to a huge external surplus, in Germany about the insufficient compliance with fiscal rules and the lack of structural reforms in France. What are the real causes of the divergence between the two economies? We show that different indicators of competitiveness yield very different results depending on the base period used, e.g. 1995 (peak of reunification boom), 1999 or 1990. A comparison with the preunification period shows little gain in competitiveness. We also find, somewhat surprisingly, that Germany's industry is not more integrated in international value chains than that of France or Italy. We then look at the link between export growth and export prices and argue that in the long run exports are not driven by competitiveness but by the increased supply of labor resulting from unification. In addition, we ask what drove 'wage moderation' in Germany: policy or the labor market. We finally analyse the longer-term trend in fiscal policy and the resulting distributional consequences in both countries. Our more general policy implication is that any analysis which compares today to the trough of German performance after unification risks over-estimating the potential of the country. Given that the 'internal unification' process is complete now, one should not expect the Germans to continue to outperform France as it has done over the last two decades. |
| Keywords: | France,Germany,international competitiveness,current account imbalances,wage moderation |
| JEL: | E62 F16 F41 F45 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:843&r=all |
| By: | Boris Hofmann; Ilhyock Shim; Hyun Song Shin |
| Abstract: | Borrowing through domestic currency bonds has not insulated emerging market economies (EMEs) from the financial shock unleashed by Covid-19; EME local currency bond spreads spiked amid sharp currency depreciations and capital outflows. Portfolio investors face amplified losses as local currency spreads and exchange rates move in lockstep; their revised portfolio allocations in turn strengthen this correlation. EMEs with monetary policy frameworks that are equipped to address the feedback loop between exchange rate depreciation and capital outflows stand a better chance of weathering the financial fallout from the Covid-19 pandemic. To counter large stock adjustments in domestic bond markets, EME central banks may need to expand their toolkit to take on a "dealer of last resort" role; a number of them are already moving in this direction. |
| Date: | 2020–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:bisblt:5&r=all |
| By: | Konstantin Egorov (New Economic School); Dmitry Mukhin (WISC) |
| Abstract: | Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the optimal policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, timeor state-dependent price setting, a rich set of shocks, and endogenous currency choice. We show that although monetary policy is less ecient and cannot implement the exible-price allocation, ination targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a “global monetary cycle†with other countries partially pegging their exchange rates to the dollar and importing the monetary stance of the U.S. In spite of the aggregate demand externality, capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. The optimal U.S. policy, on the other hand, deviates from ination targeting to take advantage of its eects on global product and asset markets, generating negative spillovers on the rest of the world. International cooperation benets other countries by improving global demand for dollar-invoiced goods, but may be hard to sustain because it is not in the self-interest of the U.S. At the same time, countries can still gain from local forms of policy coordination — such as forming a currency union like the Eurozone. |
| Date: | 2020–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:abo:neswpt:w0261&r=all |
| By: | Nathan Converse; Eduardo Levy Yeyati; Tomás Williams |
| Abstract: | This paper examines how the growth of exchange-traded funds (ETFs) has affected the sensitivity of international capital flows to global financial conditions. Using data on individual emerging market funds worldwide, we employ a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. We find that the sensitivity of flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. We then show that our findings have macroeconomic implications. In countries where ETFs hold a larger share of the equity market, total cross-border equity flows and returns are significantly more sensitive to global financial conditions. Our results imply that the increasing role of ETFs as a channel for international capital flows has amplified the global financial cycle in emerging markets. |
| Keywords: | Exchange-traded funds; Mutual funds; Global financial cycle; Global risk; Push and pull factors; Capital flows; Emerging markets |
| JEL: | F32 G11 G15 G23 |
| Date: | 2019–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1268&r=all |
| By: | Claire Giordano (Banca d’Italia) |
| Abstract: | This paper documents the recent innovations to the Bank of Italy methodology underlying the estimation of price-competitiveness misalignments , first put forward in Giordano (2018); it also provides the most recent misalignment estimates for the euro area and for its four main economies, based on five alternatively deflated indicators. The extension of the sample period, the recalibration of the trade weights employed and the significant data revisions and refinements introduced have not qualitatively modified the assessment of misalignments since 1999 for the afore-mentioned economies, although point estimates have changed non-negligibly. In the first half of 2019, no significant price competitiveness misalignment is recorded for Italy and for the euro area as a whole, whereas for France, Germany and Spain there is still evidence of a modest undervaluation. |
| Keywords: | price competitiveness, real effective exchange rate, equilibrium exchange rate, external imbalances |
| JEL: | E31 F00 F31 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_556_20&r=all |
| By: | Oliver de Groot; Ceyhun Bora Durdu; Enrique G. Mendoza |
| Abstract: | Global and local methods are widely used in international macroeconomics to analyze incomplete-markets models. We study solutions for an endowment economy, an RBC model and a Sudden Stops model with an occasionally binding credit constraint. First-order, second-order, risky steady state and DynareOBC solutions are compared v. fixed-point-iteration global solutions in the time and frequency domains. The solutions differ in key respects, including measures of precautionary savings, cyclical moments, impulse response functions, financial premia and macro responses to credit constraints, and periodograms of consumption, foreign assets and net exports. The global method is easy to implement and faster than local methods for the endowment model. Local methods are faster for the RBC model and the global and DynareOBC solutions are of comparable speed. These findings favor global methods except when prevented by the curse of dimensionality and urge caution when using local methods. Of the latter, first-order solutions are preferable because results are very similar to second-order methods. |
| Keywords: | Solution methods; Sudden stops; Incomplete markets; Precautionary savings; Occasionally binding constraints |
| JEL: | D82 E44 F41 |
| Date: | 2020–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-06&r=all |
| By: | Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries |
| Abstract: | The use of futures exchange contracts instead of forwards completes the maturity spectrum of the correlation between the spot yield and the premium. We find that the forward premium puzzle (FFP) depends significantly on the maturity horizon of the futures contract and the choice of sampling period. The FFP appears to be a pre-crisis phenomenon and is only observed for maturities longer than about one month. When examining whether the observed excess returns of futures contracts represent a fair compensation for currency risk, we find that non-durable consumption risk and market risk can explain excess currency returns. But only in the pre-crisis period and when the maturity of the assets is longer than about three months. |
| Keywords: | Forward premium puzzle, uncovered interest parity, futures rates, risk premium, currency excess returns, capital asset pricing model |
| JEL: | F31 F37 G12 G13 G15 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1866&r=all |
| By: | Gustavo Iglésias; Pedro Mazeda Gil |
| Abstract: | Monetary authorities have followed interest-rate feedback rules in apparently different ways over time and across countries. The literature distinguishes, in particular, between active and passive monetary policies in this regard. We address the nominal and real transitional-dynamics implications of these different types of monetary policy, in the context of a monetary growth model of R&D and physical capital accumulation. In this setup, well-behaved transitional dynamics occurs under both active and passive monetary policies. We carry out our study from three perspectives: the convergence behaviour of catching-up economies; a structural monetary-policy shock (i.e., a change in the long-run inflation target); and real industrialpolicy shocks (i.e., a change in R&D subsidies or in manufacturing subsidies). We uncover a new channel through which institutional factors (the characteristics of the monetary-policy rule) influence the economies’ convergence behaviour and through which monetary authorities may leverage (transitional) growth triggered by structural shocks. |
| JEL: | E41 O31 O41 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202003&r=all |
| By: | Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University) |
| Abstract: | While foreign direct investment (FDI) is known to be the most stable type of international capital flows, it may be particularly susceptible to heightened uncertainty because of its high fixed costs. We investigate the effect of domestic policy uncertainty on FDI inflows into 16 host countries using the OECD bilateral FDI panel dataset and the Economic Policy Uncertainty (EPU) index from 1985 to 2013. The bilateral structure of the data enables us to disentangle pull factors of FDI from its push factors, thereby obtaining a cleaner causal identification of the higher domestic policy uncertainty effect. To alleviate remaining endogeneity concerns, we use the timing of “exogenous” elections as an instrument. We find that domestic policy uncertainty in a host country robustly reduces the FDI inflows, with the effect being larger in countries with less financial development. |
| Keywords: | Economic policy uncertainty; FDI inflows; Elections; Financial development |
| JEL: | F21 F32 F42 |
| Date: | 2020–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2020_007&r=all |