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on Open Economy Macroeconomics |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | For most of the post WWII period, until recently, trade protectionism followed a downward trend, and was formulated in multilateral or bilateral agreements between countries. Recently however, there hasbeen a sharp shift towards unilateral, discretionary trade policy focused on short term macroeconomic objectives, and as a consequence, the use of trade policy has become entangled with that of monetary policy. This paper explores the consequences of this shift within a standard DSGE open economy macroeconomic model. We find that a discretionary non-cooperative approach to trade policy can significantly worsen macroeconomic conditions. Moreover, the stance of monetary policy has major implications for the degree of protection in a non-cooperative equilibrium. In particular, cooperative determination of monetary policy implies an increase in both equilibrium tariffs and inflation, and a significant fall in welfare. By contrast, when the exchange rate is pegged by one country, equilibrium rates of protection are generally lower, but in this case, there are multiple asymmetric equilibria in tariff rates which benefit one country relative to another. We also explore the determination of non-cooperative tariffs in a situation where monetary policy is constrained by the zero lower bound on nominal interest rates. |
| JEL: | F30 F40 F41 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27460&r=all |
| By: | Evans, Martin |
| Abstract: | I use Forex trading data to study how risks associated with the lack of liquidity contribute to the dynamics of 17 spot exchange rates through their time-varying contributions to risk premia. I find that liquidity risk matters. All the foreign exchange risk premia compensate investors for exposure to liquidity risk; and, for many currencies, exposure to liquidity risk appears to be more important than exposure to the traditional carry and momentum risk factors. I also find that variations in the price of liquidity risk make economically important contributions to the behavior of individual foreign currency returns: they account for approximately 34 percent, on average, of the variability in currency returns compared to the contribution of approximately 8 percent from the prices of carry and momentum risk. |
| Keywords: | Foreign Currency Trading, Liquidity, Returns, Risk Premia, and Risk Factors |
| JEL: | F3 F4 G1 |
| Date: | 2020–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102702&r=all |
| By: | Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig |
| Abstract: | We build a model of the global financial cycle with one key ingredient: the demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, low U.S. interest rates and exorbitant privilege, spillovers of the U.S. monetary policy to the rest of the world, and the dollar as a global risk factor. In doing so, we lay out a novel transmission mechanism through which the U.S. monetary policy affects the currency market and the global economy. |
| JEL: | E4 F3 G15 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27682&r=all |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Sami Alpanda (University of Central Florida, Orlando, FL) |
| Abstract: | This paper shows that national bank regulation can ensure nancial and economy stability only if business cycles are driven by domestic and non- nancial global shocks. If global nancial shocks are more important, by contrast, national regulatory policies can be destabilizing. These inferences are drawn from a two-country DSGE model with global banking, nancial regulation and the nancial accelerator mechanism. The results indicate that bank regulation suppresses the ampli cation e¤ects of the nancial accelerator mechanism when countries face domestic and non- nancial global shocks. When there is a global nancial shock, however, highly-regulated countries are more vulnerable to the ebbs and ows of global bank lending since their rms are more leveraged and externally funded. More generally, the results imply that the nancial trilemma is not binding in economies where domestic and non- nancial global shocks drive the business cycle. |
| Keywords: | bank regulation, DSGE, nancial accelerator, global banks, nancial trilemma. |
| JEL: | E32 E44 F33 F44 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2020-02ua&r=all |
| By: | Robert Kollmann |
| 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 results 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: | 2020–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:88643&r=all |
| By: | Kindberg-Hanlon,Gene; Okou,Cedric Iltis Finafa |
| Abstract: | Labor productivity in EMDEs is just under one-fifth of the advanced economy average, while in LICs, it is just 2 percent. Average productivity growth in EMDEs has picked up rapidly since 2000, renewing interest in the convergence hypothesis, which predicts that economies with low productivity should close productivity gaps over time. However, the average rate of convergence remains low, with current growth differentials halving the productivity gap only after over 100 years. Behind the low average pace of convergence lies considerable diversity among groups of countries converging toward different productivity levels (convergence clubs). Many EMDEs have moved into higher-level productivity convergence clubs since 2000, with 16 joining the highest club, primarily consisting of advanced economies. These transitioning EMDEs have been characterized by systematically better initial education levels, greater institutional quality, and high or deepening economic complexity relative to their income level, frequently aided by policies to encourage participation in global value chains. Countries seeking to replicate successes, or continue along rapid convergence paths, face a range of headwinds, including a more challenging environment to gain market share in manufacturing production or to increase global value chain integration. |
| Keywords: | Labor Markets,International Trade and Trade Rules,Educational Sciences,Economic Growth,Industrial Economics,Economic Theory&Research |
| Date: | 2020–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9378&r=all |
| By: | Damián Pierri (Universidad de San Andres & IIEP-BAIRES-UBA); Gabriel Montes-Rojas (IIEP-BAIRES-UBA); Pablo Mira-Llambi (Universidad de San Andres & IIEP-BAIRES-UBA) |
| Abstract: | Persistent current account deficits are common among low and middle income countries. We evaluate when this situation is dangerous. We find a critical value for the yearly current account deficit just before the crisis sets off and these findings give rise to an empirical measure of overborrowing: countries that have increased their external indebtedness by at least 26%-31% of the GDP in a time span of 3 to 5 years are more prone to be hit by a sudden stop. The typical crisis produces a consumption drop of 4% of GDP and a current account reversal of 2.5-4.5% of GDP. We also contribute to the structural characterization of sudden stops. Using a canonical model we are able to replicate these stylized facts. Moreover, we compute the corresponding ratio of net debt to GDP. This parameter is two or three times bigger than the benchmark value in the literature, a fact that improves the empirical performance of the model. From a policy perspective, our findings help to elaborate leading indicators to anticipate a sudden stop. |
| Keywords: | sudden stops, current account deficits, debt, crisis |
| JEL: | F32 F41 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:146&r=all |
| By: | Matteo Cacciatore; Fabio Ghironi |
| Abstract: | We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand. |
| JEL: | E24 E32 E52 F16 F41 J64 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27474&r=all |
| By: | Corbo, Vesna (Monetary Policy Department, Central Bank of Sweden); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | The Swedish economy is strongly dependent on global economic developments, which is reflected in generally strong empirical relationships between Swedish and foreign macroeconomic variables. It is, however, difficult for standard open-economy dynamic stochastic general equilibrium (DSGE) models to generate substantial cross-country spillovers; see e.g. the seminal paper of Justiniano and Preston (2010). We present a two-region DSGE model that better captures the dependence on global economic developments than previous models. It is estimated on data for Sweden and an aggregate of its main trading partners, the euro area and the United States, for the period 1995Q2.2018Q4. To capture the strong empirical relationships between Sweden and the foreign economy, we assume that global shocks to e.g. technology, real interest rates, financial risk, and firm and consumer sentiment directly affect both economies, while their impact on each economy may differ. We also allow for a flexible specification of the demand for Swedish exports to better account for the fluctuations in Swedish trade. Finally, headline and core inflation are distinguished by the introduction of consumption of energy goods, which allows for a more detailed and realistic analysis of inflation developments. This new model, named MAJA (Modell för Allmän JämviktsAnalys), is used by the Riksbank for interpretation of economic developments, forecasting, scenarios, and policy analysis. It builds on the work of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) and the Riksbank.s previous models, Ramses I and Ramses II (see Adolfson et al. (2007) and Adolfson et al. (2013), respectively). |
| Keywords: | DSGE model; Monetary Policy; Open economy; International spillovers; Bayesian estimation. |
| JEL: | C11 C32 C52 E30 E37 E40 E52 F41 F44 |
| Date: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0391&r=all |
| By: | Sengupta, Darpajit; Sinha Roy, Saikat |
| Abstract: | This study is aimed at estimating the Exchange Rate Pass Through (ERPT) to export prices of Indian Automobiles at HS 8 digit level classification. Using profit maximising approach of firms, in lines of Bailliu and Fujii (2004) theoretical specification this paper estimates the ERPT elasticities in the ambit of dynamic panel data technique. While the pass through is quite low for tractors and bicycles, the elasticities are high for vehicular spare parts and fighting equipment like tankers etc. Unlike in the short run, the pass through is relatively high in the long run. The dynamic panel results at the aggregate level show that trade openness and world demand are statistically significant variables in explaining the volatility of export prices in a small open economy like India. The findings on exchange rate pass through have implications for exchange rate being used as an important policy instrument for export promotion and growth on one hand, and in reducing current account deficit, on the other hand. |
| Keywords: | exchange rate pass-through, export prices, dynamic panel data |
| JEL: | C23 F14 F31 F41 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102533&r=all |
| By: | William Chen (Williams College); Gregory Phelan (Williams College) |
| Abstract: | Lack of coordination for prudential regulation hurts developing economies but benefits advanced economies. We consider a two-country macro model in which countries have limited ability to issue state-contingent contracts in international markets. Both countries have incentives to stabilize their economy by using prudential limits, but the emerging economy depends on the advanced economy to bear global risk. Financially developed economies are unwilling to intermediate global risk, which means bearing systemic risk, preferring financial stability over credit flows. Advanced economies prefer tighter prudential limits than would occur with coordination, giving them greater bargaining power when negotiating international agreements. |
| Keywords: | International Capital Flows, Capital Controls, Macroeconomic Instability, Macroprudential Regulation, Policy Coordination, Spillovers, Financial Crises. |
| JEL: | E44 F36 F38 F42 G15 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2020-05&r=all |
| By: | Zhen Zhu; Enzo Weber; Till Strohsal; Duaa Serhan |
| Abstract: | Most of the existing literature on the current pandemic focuses on approaches to model the outbreak and spreading of COVID-19. This paper proposes a generalized Markov-Switching approach, the SUIHR model, designed to study border control policies and contact tracing against COVID-19 in a period where countries start to re-open. We offer the following contributions. First, the SUIHR model can include multiple entities, reflecting different government bodies with different containment measures. Second, constraints as, for example, new case targets and medical resource limits can be imposed in a linear programming framework. Third, in contrast to most SIR models, we focus on the spreading of infectious people without symptoms instead of the spreading of people who are already showing symptoms. We find that even if a country has closed its borders completely, domestic contact tracing is not enough to go back to normal life. Countries having successfully controlled the virus can keep it under check as long as imported risk is not growing, meaning they can lift travel restrictions with similar countries. However, opening borders towards countries with less controlled infection dynamics would require a mandatory quarantine or a strict test on arrival. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.13561&r=all |
| By: | Goldbach, Stefan; Nitsch, Volker |
| Abstract: | This paper examines the effect of administrative restrictions on cross-border capital transactions. Using highly disaggregated data from the German balance of payments statistics for the period from 1999 through 2017, we document several stylized facts about the effectiveness of such capital control policies introduced by other countries. Capital controls are associated with economically and statistically significant declines in capital flows; they affect bilateral financial relationships along both the extensive and the intensive margin. Capital controls have also been effective in reducing capital flows within the European Union. |
| Keywords: | restriction,capital flow,transaction |
| JEL: | F32 F36 F38 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:472020&r=all |
| By: | Roberta Cardani (European Commission, Joint Research Centre (JRC), Ispra, Italy); Stefan Hohberger (European Commission, Joint Research Centre (JRC), Ispra, Italy); Philipp Pfeiffer (European Commission, Directorate General for Economic and Financial Affairs, Brussels, Belgium); Lukas Vogel (IRES, UCLouvain and European Commission, Directorate General for Economic and Financial Affairs, Brussels, Belgium) |
| Abstract: | Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened. |
| Keywords: | Agnostic structural disturbances, open economy DSGE model, trade balance, Germany, Spain |
| JEL: | F30 F32 F41 F45 |
| Date: | 2020–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2020025&r=all |