|
on Open Economy Macroeconomics |
| By: | Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal |
| Abstract: | In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways. |
| Date: | 2020–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/121&r=all |
| By: | Kollmann, Robert |
| Abstract: | The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)). |
| Keywords: | Zero lower bound, liquidity trap, monetary union, terms of trade, international fiscal spillovers, Euro Area. |
| JEL: | E3 E4 F2 F3 F4 |
| Date: | 2020–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102323&r=all |
| By: | Filippo Gori; Etienne Lepers; Caroline Mehigan |
| Abstract: | In a financially interconnected world, individual countries’ policy choices affect other economies and can become a source of international shocks. Leveraging on a new quarterly dataset of capital control adjustments, we find renewed evidence that the introduction of capital controls in one economy increases capital inflows to other similar borrowing economies. |
| Keywords: | Bilateral capital flows, Capital controls, Emerging markets, Externalities, Spillovers |
| JEL: | F21 F32 F38 F42 |
| Date: | 2020–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1613-en&r=all |
| By: | Kollmann, Robert |
| Abstract: | This paper studies fluctuations of interest rates, inflation and output in a two-country New Keynesian business cycle model with a zero lower bound (ZLB) constraint for nominal interest rates. The presence of the ZLB generates multiple equilibria driven by self-fulfilling changes in domestic and foreign inflation expectation. Each country randomly switches in and out of a liquidity trap. In a floating exchange rate regime, liquidity traps can either be synchronized or unsynchronized across countries. This is the case even if countries are perfectly financially integrated. By contrast, in a monetary union, self-fulfilling fluctuations in inflation expectations must be perfectly correlated across countries. |
| Keywords: | Zero lower bound, liquidity trap, global business cycles |
| JEL: | E3 E4 F2 F3 F4 |
| Date: | 2020–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102324&r=all |
| By: | Emter, Lorenz (Central Bank of Ireland and Trinity College Dublin) |
| Abstract: | Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2017, this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks. |
| Keywords: | international capital flows, sudden stops, financial stability. |
| JEL: | E32 F30 F32 F34 G15 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:06/rt/20&r=all |
| By: | Corbo, Vesna (Monetary Policy Department, Central Bank of Sweden); Di Casola, Paola (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | We study the fluctuations of exchange rates and consumer prices in two small open economies, Sweden and Canada, using a structural Bayesian VAR. Four domestic and two global shocks are identified through zero and sign restrictions. For both economies, we find that the main driver of consumer price inflation is the global demand shock. A negative global demand shock is not only deflationary for the small open economy, but also depreciates its currency. Hence, the observed exchange rate pass-through following this shock is of opposite sign to what is usually expected. Finally, exogenous shocks to the Exchange rate are less important drivers of exchange rate movements than in many other structural models. |
| Keywords: | Exchange rate pass-through; consumer prices; import prices; monetary policy; global shocks; SVAR |
| JEL: | E31 E52 F31 F41 |
| Date: | 2020–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0387&r=all |
| By: | Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Casas, Camila; Boz, Emine; Nguyen, Tra; Gopinath, Gita |
| Abstract: | This paper presents the most comprehensive and up-to-date panel data set of invoicing currencies in global trade. It provides data on the shares of exports and imports invoiced in US dollars, euros, and other currencies for more than 100 countries since 1990. The evidence from these data confirms findings from earlier research regarding the globally dominant role of the US dollar in invoicing – despite the comparatively smaller role of the US in global trade – and the overall stability of invoicing currency patterns. But the evidence also points to several novel stylised facts. First, both the US dollar and the euro have been increasingly used for invoicing even as the share of global trade accounted for by the US and the euro area has declined. Second, the euro is used as a vehicle currency in parts of Africa, and some European countries have seen significant shifts toward euro invoicing. And third, as suggested by the dominant currency paradigm, countries invoicing more in US dollars (euros) tend to experience greater US dollar (euro) exchange rate pass-through to their import prices; also, their trade volumes are more sensitive to fluctuations in these exchange rates. JEL Classification: F14, F31, F44 |
| Keywords: | dominant currency paradigm, exchange rate pass-through, invoicing currency of trade |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202456&r=all |
| By: | Gregory de Walque (Research and Economics Department - National Bank of Belgium); Thomas Lejeune (Research and Economics Department - National Bank of Belgium and and HEC-University of Liège.); Ansgar Rannenberg (Research and Economics Department - National Bank of Belgium); Raf Wouters (Research and Economics Department - National Bank of Belgium) |
| Abstract: | This paper jointly analyses two major challenges of the canonical NOEM model: i) combining a relatively important exchange rate pass-through at the border with low pass-through at the consumer level, and ii) generating significant endogenous international business cycle synchronization. These issues have been separately analysed in the literature, with extension of the NOEM with a distribution sector for mitigating the exchange-rate pass-through, and foreign input trade for spillovers. We show that introducing input trade for price-maker firms rehabilitate the model regarding the pass-through disconnect, which is especially helpful to model very open economies, while adding a distribution sector lacks flexibility to do so. Moreover, these two extensions of the canonical model mitigate the expenditure switching effect, with implications in terms of international synchronization. |
| Keywords: | Exchange rate pass-through, International trade in intermediate goods, International correlations, Small open economies. |
| JEL: | E31 E32 F41 F44 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202007-386&r=all |
| By: | Jacquinot, Pascal (European Central Bank); Lozej, Matija (Central Bank of Ireland); Pisani, Massimiliano (Bank of Italy) |
| Abstract: | We simulate a version of the EAGLE, a New Keynesian multi-country model of the world economy, to assess the macroeconomic effects of US tariffs imposed on one country member of the euro area (EA), and the rest of the world (RW). The model is augmented with an endogenous effective lower bound (ELB) on the monetary policy rate of the EA and country-specific labour markets with search-and-matching frictions. Our main results are as follows. First, tariffs produce recessionary effects in each country. Second, if the ELB holds, then the tariff has recessionary effects on the whole EA, even if it is imposed on one EA country and the RW. Third, if the ELB holds and the real wage is flexible in the EA country subject to the tariff, or if there are segmented labour markets with directed search within each country, then the recessionary effects on the whole EA are amplified in the short run. Fourth, if the elasticity of substitution among tradables is low, then the tariff has recessionary effects on the whole EA also when the ELB does not hold. |
| Keywords: | DSGE models, protectionism, unemployment, monetary policy. |
| JEL: | F16 F41 F42 F45 F47 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:04/rt/20&r=all |