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on Open Economy Macroeconomics |
| By: | Coppola, Antonio; Maggiori, Matteo; Neiman, Brent; Schreger, Jesse |
| Abstract: | Global firms finance themselves through foreign subsidiaries, often shell companies in tax havens, which obscures their nationality in aggregate statistics. We associate the universe of traded securities with their issuer's ultimate parent and restate bilateral investment positions to better reflect the true financial linkages connecting countries around the world. We find that portfolio investment from developed countries to firms in large emerging markets is dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly \$600 billion, while China's official net creditor position to the rest of the world is overstated by about 50 percent. We additionally show how taking account of offshore issuance is important for our understanding of the currency composition of external portfolio liabilities, the nature of foreign direct investment, and the growth of financial globalization. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14508&r=all |
| By: | Corsetti, Giancarlo; Marin, Emile Alexandre |
| Abstract: | A long-standing puzzle in international finance is that a positive interest rate differen- tial systematically forecasts an exchange rate appreciation-the Uncovered Interest Parity (UIP) puzzle. Hence, a carry trade portfolio long in high yield currency bonds funded by borrowing in low yield currencies can be expected to yield positive profits. Following the Great Financial Crisis, however, the sign of the puzzle has changed-positive differentials forecast excessive depreciation-and carry trade has withered after the large losses suffered by investors in 2007-2008. In this paper, we use a century-long time series for the GBP/USD exchange rate to show that a sign switch is neither new, nor, arguably, a new puzzle. First, it is not new in the data-by virtue of a long sample featuring infrequent, non-overlapping currency crashes, we document that switches systematically occur in crises such as the Great Depression in the 1930s and the exchange rate turmoil of the 1990s. However, UIP devi- ations, sharp in either direction for short- to medium-horizon portfolios, remain small to almost negligible for long-horizon investment portfolios. Second, we argue that our century- long evidence is consistent with models featuring a time-varying probability of disasters or 'Peso events,' specified so to account for the difference in UIP deviations in crisis and nor- mal times, as well as for a decreasing term structure of carry trade returns that on average characterize the data. |
| Keywords: | carry trade; Currency Crises; Fama Puzzle; Great Depression; Peso Problem; uncovered interest parity |
| JEL: | F31 F41 G15 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14497&r=all |
| By: | Bodenstein, M.; Corsetti, G.; Guerrieri, L. |
| 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: | 2020–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2006&r=all |
| By: | Noel GASTON; YOSHIMI Taiyo |
| Abstract: | We incorporate different sectoral job separation rates into a two-sector small open economy model to investigate the Balassa-Samuelson (B-S) effect. While labour is mobile, unemployment occurs due to search frictions. In addition, unequal separation rates give rise to compensating wage differentials. When productivity grows in the tradeables sector, labour moves from the tradeables sector to the nontradeables sector if tradeables and nontradeables are complements in consumption. Nevertheless, unemployment always falls due to the positive income effect. We also find that the effect of productivity growth in the tradeables sector on the real exchange rate is reduced by almost 38 per cent when separation rates differ across sectors and tradeables and nontradeables are complements. Overall, an overvaluation of the real exchange rate in the basic B-S model can be explained by heterogeneous job separations. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:20032&r=all |
| By: | Javier Bianchi; César Sosa-Padilla |
| Abstract: | In the past three decades, governments in emerging markets have accumulated large amounts of international reserves, especially those with fixed exchange rates. We propose a theory of reserve accumulation that can account for these facts. Using a model of endogenous sovereign default with nominal rigidities, we show that the interaction between sovereign risk and aggregate demand amplification generates a macroeconomic-stabilization hedging role for international reserves. Reserves increase debt sustainability to such an extent that financing reserves with debt accumulation may not lead to increases in spreads. We also study simple and implementable rules for reserve accumulation. Our findings suggest that a simple linear rule linked to spreads can achieve significant welfare gains, while those rules currently used in policy studies of reserve adequacy can be counterproductive. |
| JEL: | F32 F34 F41 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27323&r=all |
| By: | Hyeongwoo Kim; Ying Lin; Henry Thompson |
| Abstract: | A number of researchers have found that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a shrinking exchange rate effect on the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current floating exchange rate regime. Our VAR approach nests the conventional single equation method and reveals statistically significant evidence of ERPT to the CPI only during later observations, sharply contrasting with previous findings. After confirming structural breaks in ERPT via statistical tests by Hansen (2001) and Qu and Perron (2007), we seek the source with disaggregated level CPIs, and pin down a key role of energy prices. US energy imports increased from the 1990s until the recent recession. This market changes magnify the effects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via the energy price channel. |
| Keywords: | Exchange Rate Pass Through; Disaggregated CPI Inflation; Structural Break; Real Exchange Rate Shock |
| JEL: | E31 F31 F41 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2020-03&r=all |
| By: | Obstfeld, Maurice |
| Abstract: | Fifty years ago, Harry G. Johnson published "The Case for Flexible Exchange Rates, 1969," its title echoing Milton Friedman's earlier 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. |
| Keywords: | dominant currency pricing; effective lower bound; exchange rate regimes; Floating Exchange Rates; Global financial cycle; global value chains; international monetary system |
| JEL: | F31 F33 F41 F42 N20 N24 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14488&r=all |
| By: | Eiji Fujii |
| Abstract: | Even though external debt can play a buffer role against adverse shocks to assist consumption smoothing, it may also exert a volatility amplifying effect, depending on the currency of denomination and the cyclicality of the borrower’s exchange rate. We empirically investigate the nexus between the debt denomination portfolio, exchange rate cyclicality, and consumption volatility of low- and middle-income countries. On constructing the debt-weighted effective exchange rates, we examine how the denomination portfolio affects the debtors’ exchange rate cyclicality to influence the consumption response to transitory income shocks. We find that portfolio concentration enhances exchange rate pro-cyclicality, which makes consumption more volatile when income shocks occur. Our results suggest that portfolio diversification is a useful tool for countries with original sin to hedge against bumpy consumption paths. |
| Keywords: | external debt, currency portfolio, original sin, exchange rate cyclicality, consumption volatility |
| JEL: | F34 F31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8287&r=all |
| By: | Benigno, Gianluca; Foerster, Andrew; Otrok, Christopher; Rebucci, Alessandro |
| Abstract: | We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between being the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt, Tequila, and Global Financial Crises. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by cocktails of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified. |
| Keywords: | Bayesian estimation; business cycles; Endogenous Regime-Switching; financial crises; Mexico; occasionally binding constraints |
| JEL: | C11 E3 F41 G01 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14545&r=all |
| By: | Degasperi, Riccardo; Hong, Simon; Ricco, Giovanni |
| Abstract: | This paper studies the transmission of US monetary shocks across the globe by employing a high-frequency identification of policy shocks and large VAR techniques, in conjunction with a large macro-financial dataset of global and national indicators covering both advanced and emerging economies. Our identification controls for the information effects of monetary policy and allows for the separate analysis of tightenings and loosenings of the policy stance. First, we document that US policy shocks have large real and nominal spillover effects that affect both advanced economies and emerging markets. Policy actions cannot fully isolate national economies, even in the case of advanced economies with flexible exchange rates. Second, we investigate the channels of transmission and find that both trade and financial channels are activated and that there is an independent role for oil and commodity prices. Third, we show that effects are asymmetric and larger in the case of contractionary US monetary policy shocks. Finally, we contrast the transmission mechanisms of countries with different exchange rates, exposure to the dollar, and capital control regimes. |
| Keywords: | Exchange Rates; Foreign Spillovers; monetary policy; trilemma |
| JEL: | C3 E5 F3 F4 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14533&r=all |
| By: | Mirko Abbritti, Ivan Kim, Tommaso Trani |
| Abstract: | In the data, emerging market economies’ exports tend to grow after real devaluations, but even when these are large, the rise in export revenues is low and delayed. We examine this fact by in- troducing long-term trade relationships and bargaining into a standard small open economy model. Both domestic exporters and foreign importers need to spend time and resources to establish trade relationships. Once a relationship is formed, export prices and quantities are decided through bilat- eral bargaining. The presence of search frictions and bargaining alters the transmission mechanism of shocks. The long-term nature of trade relationships reduces the expenditure-switching effect re- sulting from exchange rate fluctuations and the allocative role of intermediate export prices. These elements improve the ability of the model to explain export growth following a large devaluation as well as other second moments. Moreover, our sensitivity analysis suggests that higher exporters’ bargaining power or lower trade adjustment costs would make an economy more resilient to interest rate shocks. |
| Keywords: | Search and Matching, Price Bargaining, Real Exchange Rate, Devaluation, Export Dynamics. |
| JEL: | E32 F41 F31 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nva:unnvaa:wp04-2020&r=all |