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on Open Economy Macroeconomics |
| By: | Schmitt-Grohé, Stephanie; Uribe, Martin |
| Abstract: | This paper establishes the existence of deterministic cycles in infinite-horizon open economy models with a flow collateral constraint. It shows that for plausible parameter configurations, the economy has a unique equilibrium exhibiting deterministic cycles in which periods of debt growth are followed by periods of debt deleveraging. In particular, three-period cycles exist, which implies by the Li-Yorke Theorem the presence of cycles of any periodicity and chaos. The paper also shows that deterministic cycles are absent in the Ramsey optimal allocation providing a justification for macroprudential policies even in the absence of uncertainty. |
| Keywords: | capital controls; Chaos; Credit Booms; Deleveraging; Deterministic cycles; flow collateral constraints; Pecuniary externality |
| JEL: | E32 F38 F41 H23 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14248&r=all |
| By: | Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas |
| Abstract: | This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions. |
| Keywords: | Brexit; exchange rate pass-through; import costs; inflation |
| JEL: | E31 F15 F31 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14176&r=all |
| By: | Brueckner, Markus; Paczos, Wojtek; Pappa, Evi |
| Abstract: | We examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that domestic saving has: (i) a small effect on the current account; (ii) a significant positive and quantitatively sizable effect on the trade balance; (iii) a significant negative effect on net-current transfers. We use countries in the sub-Saharan African region as a laboratory for an instrumental variables approach. The IV approach enables to obtain estimates of causal effects. Underlying the IV approach is the significant positive first-stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply-side shock. We construct a small open-economy DSGE model with debt adjustment frictions and endogenous net-current transfers to match the empirical findings. The model enables to examine how other types of shocks - such as changes in interest rates or trend TFP for which it is hard to get exogenous variation in the data - affect the relationship between domestic saving and the current account. An important implication of our findings is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving affects a country's accumulation of net foreign assets. |
| Keywords: | current account; Domestic Saving; Feldstein-Horioka Puzzle; Financial Frictions; Net Current Transfers; Small Open Economy Model |
| JEL: | F32 F35 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14104&r=all |
| By: | Anne-Laure Delatte; Alexis Guillaume |
| Abstract: | Although the pandemic was an exogenous shock, it triggered portfolio rebalancing in the Euro Area (EA) implying a divergence of sovereign risk premia in the first phase of the crisis eventually followed by a narrowing of the spreads. We estimate the determinants of sovereign bond spreads in the EA during the pandemic from January 2 2020 to May 25 2020. We find that: 1) the countries’ resilience to the COVID shock depended on healthcare capacity, the strength of the banking sector and the fiscal outlook; 2) during the crisis, ECB speeches were a game changer and made a much greater contribution than securities purchase programs; 3) coordination by the European Council also helped to reduce the spreads but the effect was partly offset by loan-based financial assistance programs |
| Keywords: | Sovereign Risk;European Monetary Union;Covid;Public Policy |
| JEL: | F30 F45 H63 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2020-08&r=all |
| By: | Ma, Chang; Rebucci, Alessandro |
| Abstract: | This paper reviews selected post-Global Financial Crisis theoretical and empirical contributions on capital controls and identifies three theoretical motives for the use of this policy tools: pecuniary externalities in models of financial crises, aggregate demand externalities in new-Keynesian models of the business cycle, and terms of trade manipulation in open economy models with pricing power. Pecuniary and demand externalities offer the most compelling case for the adoption of capital controls, but macroprudential policy can also address the same distortion. So, in general, capital controls are not the only instrument that can do the job. If evaluated through the lenses of the new theories, the empirical evidence reviewed suggests that capital controls can have the intended effects, even though the extant literature is inconclusive as to whether the effects documented amount to net gain or losses for the economies that adopted these policies. Terms of trade manipulation also provides a clear cut theoretical case for the use of capital controls, but this motive is less compelling because of the spillover and coordination issues inherent with the use of control on capital flows for this purpose. |
| Keywords: | capital controls; Capital Flows; financial crises; Pecuniary and Demand Externalities; Terms of Trade Manipulation |
| JEL: | F38 F41 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14186&r=all |
| By: | Lenarčič, Črt |
| Abstract: | This paper sets up a two-country two-sector dynamic stochastic general equilibrium model that introduces sector specific productivity shocks with quality improvement mechanism of goods. It provides a model-based theoretical background for the Harrod-Balassa-Samuelson phenomenon that describes the relationship between productivity and price inflation within different sectors of a particular economy. Both, the calibrated and the estimated model are able to show that the induced tradable sector productivity shocks drive the non-tradable and tradable sector price inflation upwards. By doing this, we overcome the problem that the tradable productivity increase in a typical open economy specification reduces the relative price of domestic tradable goods relative to the foreign ones. |
| Keywords: | Harrod-Balassa-Samuelson effect, DSGE model, inflation, productivity, quality improvement |
| JEL: | C32 E31 E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:101199&r=all |
| By: | Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez |
| Abstract: | Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both disortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the COVID-19 pandemic generates a significant currency depreciation, increased inflation, and distress in government finances. |
| Keywords: | Crises; Default; Sovereign Debt; Exchange Rate; Country Risk; Inflation; Seigniorage; Fiscal Policy; Emerging Markets; Time-consistency; COVID-19 |
| JEL: | E52 E62 F34 F41 G15 |
| Date: | 2020–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:88355&r=all |
| By: | Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel |
| Abstract: | The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits. |
| Keywords: | unconventional monetary policy,quantitative easing (QE),monetary policytransmission,excess liquidity,credit lending,heterogeneous monetary union,New Keynesianmodel |
| JEL: | E51 E52 E58 F41 F45 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:346&r=all |
| By: | Van Robays, Ine; Stracca, Livio |
| Abstract: | We identify the spill-over of demand shocks between the world's two largest advanced economies; the US and the euro area. We estimate a Bayesian VAR with sign restrictions, using standard restrictions for the domestic impact of the shock but a novel approach to identify the geographic location of the shocks and rule out common shocks. For the latter, we use the relative performance of small open economies that are neighbors of the US and the euro area, respectively Canada and Sweden, in addition to restricting the relative effects on the US, the euro area and the rest of the world. We find that demand spill-overs of US and euro area demand shocks become smaller on average when imposing relative restrictions, while they become larger in periods which are well-known to be specific to the US (global financial crisis) or the euro area (euro area sovereign debt crisis). Our results are confirmed by running a ‘placebo test’ where we replace the euro area with a small euro area economy, which should not have an independent effect on the US economy due to its small size. JEL Classification: C5, F41, F44 |
| Keywords: | Bayesian VAR, international spillovers, open economy, sign restrictions. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202430&r=all |
| By: | Martinez, Joseba; Philippon, Thomas; Sihvonen, Markus |
| Abstract: | We compare risk sharing in response to demand and supply shocks in four types of currency unions: segmented markets; a banking union; a capital market union; and complete financial markets. We show that a banking union is efficient at sharing all domestic demand shocks (deleveraging, fiscal consolidation), while a capital market union is necessary to share supply shocks (productivity and quality shocks). Using a calibrated model we provide evidence of substantial welfare gains from a banking union and, in the presence of supply shocks, from a capital market union. |
| Keywords: | Banking Union; capital market union; Currency Union; incomplete markets; Risk Sharing |
| JEL: | E44 F36 F45 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14220&r=all |
| By: | Edgar J. Sánchez Carrera (Department of Economics, Society & Politics, Universit? di Urbino Carlo Bo - Researh Fellow at the ResearchCenter in Applied Mathematics, Universidad Aut´onoma de Coahuila, Mexico); Vanesa Avalos-Gaytán (ResearchCenter in Applied Mathematics, Universidad Aut´onoma de Coahuila, Mexico); Yajaira Cardona Valdés (ResearchCenter in Applied Mathematics, Universidad Aut´onoma de Coahuila, Mexico) |
| Abstract: | Does the synchronization of globalized-oscillating economies matter for macroeconomic outcomes? If so, how oscillating economies are synchornized and conform stable networks. In this paper we apply phase oscillator models such as Kuramoto’s model to understand synchronization phenomena in networks of countries. Our aim is to study a network of interacting phase oscillating economies, and an adaptation mechanism for the coupling that promotes the connection strengths between those elements that are dynamically correlated. Under these circumstances, the dynamical organization of the oscillators/economies shapes the topology of the graph in such a way that modularity and assortativity features emerge spontaneously and simultaneously. Our results show the conformation of the network and the global and local synchronization measures for the 42 oscillating economies during the period from 1960 to 2018, using Trade (% of GDP) data. Moreover, we obtain the measure of local assortativity in the formation of those economies that more or less interact or are connected. We conclude that the Kuramoto model with networks is a useful tool to study economics synchronization. |
| Keywords: | Business Cycles, Complex Systems, Economics of Globalization, Network Topology, Synchronization, Trade Integration. |
| JEL: | D85 F14 F15 F41 F44 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:19_09&r=all |