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on Open Economy Macroeconomics |
| By: | Gianluca Benigno; Andrew T. Foerster; Christopher Otrok; Alessandro Rebucci |
| Abstract: | We estimate a workhorse dynamic stochastic general equilibrium (DSGE) model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between 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 Crisis in the early 1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late 2000s. These crisis episodes display sluggish and long-lasting build-up and recovery phases driven by plausible combinations of shocks. |
| Keywords: | financial crises; business cycles; endogenous regime-switching; Bayesian estimation; occasionally binding constraints; Mexico |
| JEL: | G01 E3 F41 C11 |
| Date: | 2020–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:88974&r=all |
| By: | Yothin Jinjarak; Ilan Noy; Quy Ta |
| Abstract: | We evaluate the change in international reserves in the aftermath of significant external shocks. We examine the response of international reserves to shocks by using a quasi-experimental setup and focusing on earthquakes. The estimation is done on a panel of 103 countries over the period 1979–2016. We find that in the five years following a large earthquake (i) countries exposed accumulate reserves, for precautionary reasons, (ii) trade openness is positively associated with the post-earthquake reserves accumulation, (iii) episodes of reserves depletion are observed in countries under the fixed exchange rate and/or inflation targeting regimes, and (iv) the patterns of reserves holding post-earthquake vary with a country’s income level. |
| Keywords: | disasters, earthquakes, international reserves, foreign exchange holding |
| JEL: | F31 F41 Q54 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8632&r=all |
| By: | Joshua Aizenman; Hiro Ito |
| Abstract: | We outline two divergent exit strategies of the U.S. from the post COVID-19 debt-overhang, and analyze their implications on Emerging Markets and global stability. The first strategy is the U.S. aiming at returning to the 2019, pre-COVID mode of loose fiscal policy and accommodating monetary policy. The short-term benefits of this strategy include faster economic growth as long as the snowball effect – the difference between the interest rate on public debt and the growth rate – is negative. This strategy may entail a growing tail risk of a deeper crisis triggered by a future reversal of the snowball effect, inducing a deeper future sudden stop crises and instability of Emerging Markets. We illustrate this scenario by evaluating Emerging Markets’ lost growth decade during the 1980s, triggered by the massive reversal of the snowball effect in the U.S. during 1974-1984. The second strategy entails a two-pronged approach. First, turning U.S. fiscal priorities from fighting COVID’s medical and economic challenges, towards investment in social, medical and physical infrastructures. Second, with a lag, promoting a gradual fiscal adjustment aiming at reaching overtime primary-surpluses and debt resilience. We illustrate this scenario by reviewing the exit strategy of the U.S. post-WWII, and its repercussions on the ‘Phoenix Emergence’ of Western Europe and Japan from WWII destruction. The contrast between the two exit strategies suggests that the two-pronged approach is akin to an upfront investment in greater long-term global stability. We also empirically show how lowering the cost of serving public debt has been associated with higher real output growth. |
| JEL: | F3 F33 F34 F41 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27966&r=all |
| By: | Jose E. Gomez-Gonzalez (Escuela Internacional de Ciencias Económicas y Administrativas, Universidad de La Sabana, Chia. Colombia.); Jorge Hirs-Garzon (Inter-American Development Bank, Washington, D.C., USA.); Jorge M. Uribe (Faculty of Economics and Business, Open University of Catalonia, Riskcenter, Universitat de Barcelona, Spain.) |
| Abstract: | We estimate the effects of financial, macroeconomic and policy uncertainty from the United States on the dynamics of credit growth, stock prices, economic activity, bond yields and inflation in five of the main receptors of US foreign direct investment from 1950 to 2019: The United Kingdom, The Netherlands, Ireland, Canada and Switzerland. Our multicounty approach allows us to clearly identify the effects of the different sources of uncertainty by imposing natural contemporaneous exogenity restrictions which cannot be used in a single-country perspective, frequently undertaken by the literature. It also considers international common cycle factors that have been previously identified and which are key to adequately measure the dynamics of the effects of uncertainty shocks on financial and real markets, on a global basis. We use an international FAVAR model to carry out our estimations. This approach permits handling a large data set consisting of variables for more than 45 countries at once. Our results point out to financial uncertainty as the main driver (even more than real uncertainty or the US interest rate) of global economic cycles. We show that increases of US financial uncertainty deteriorate economic activity on a global scale, especially by reducing credit and stock prices, and therefore funding opportunities for firms and households (heterogeneously on a country level basis). Our results emphasize the importance of financial markets, and especially financial uncertainty in the United States, as the main origin of global economic fluctuations, which can be said to describe the recent history of the global economy. They also cast doubts on the ability of uncertainty indicators based on the counting of key words in the media as a barometer of traditional economic uncertainty, known to be theoretically associated to negative outcomes in terms of activity and prices. In this sense, uncertainty indicators based on the estimation and aggregation of forecast errors seem more appropriate, hence producing results in line with the understanding of uncertainty as a negative phenomenon on a macro level, especially for investment prospects. |
| Keywords: | Macroeconomic uncertainty, Financial uncertainty, Credit markets, Funding, Global business cycles. JEL classification: D80, E44, F21, F44, G15. |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202015&r=all |
| By: | Enrique Martinez-Garcia |
| Abstract: | Much consideration has been given among scholars and policymakers to the decline in the U.S. natural rate of interest since the 2007 – 09 global financial crisis. In this paper, I investigate its determinants and drivers through the lens of the workhorse two-country New Keynesian model that captures the trade and technological interconnectedness of the U.S. with the rest of the world economy. Using Bayesian techniques, I bring the set of binding log-linearized equilibrium conditions from this model to the data, but augmented with survey-based forecasts in order to align the solution with observed expectations incorporating the macro effects of the zero-lower bound constraint. With this structural framework, I recover a novel open-economy estimate of the U.S. natural rate. The paper’s main results are: (a) the decline in the U.S. natural rate largely follows the slide of the long-run real interest rate in the forecast data, but is partly cushioned in the short run by the contribution of domestic and to a significant extent also foreign productivity shocks; (b) the fall of U.S. measured labor productivity during this time contributed to a concomitant fall in U.S. output potential; (c) the past decade is also characterized by the compression of markups (negative cost-push shocks) which accounts for much of the cyclical upswing in U.S. output in spite of the fall in its potential; and (d) monetary policy has shown its efficacy boosting U.S. output and sustaining U.S. inflation close to its 2 percent target against the drag on inflation from the negative cost-push shocks during this time. Finally, I also argue that ignoring the international linkages may result in biased estimates and can distort the empirical inferences on U.S. monetary policy in important ways. |
| Keywords: | Open Economy Model; New Keynesian; Monetary Policy; Wicksellian Natural Rate; Bayesian Estimation |
| JEL: | F41 F42 E12 E52 C11 |
| Date: | 2020–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:88968&r=all |
| By: | Gomez-Gonzalez, Jose Eduardo; Hirs-Garzon, Jorge; Uribe, Jorge M. |
| Abstract: | We estimate the effects of financial, macroeconomic and policy uncertainty from the United States on the dynamics of credit growth, stock prices, economic activity, bond yields and inflation in five of the main receptors of US foreign direct investment from 1950 to 2019: The United Kingdom, The Netherlands, Ireland, Canada and Switzerland. Our multicounty approach allows us to clearly identify the effects of the different sources of uncertainty by imposing natural contemporaneous exogenity restrictions which cannot be used in a single-country perspective, frequently undertaken by the literature. It also considers international common cycle factors that have been previously identified and which are key to adequately measure the dynamics of the effects of uncertainty shocks on financial and real markets, on a global basis. We use an international FAVAR model to carry out our estimations. This approach permits handling a large data set consisting of variables for more than 45 countries at once. Our results point out to financial uncertainty as the main driver (even more than real uncertainty or the US interest rate) of global economic cycles. We show that increases of US financial uncertainty deteriorate economic activity on a global scale, especially by reducing credit and stock prices, and therefore funding opportunities for firms and households (heterogeneously on a country level basis). Our results emphasize the importance of financial markets, and especially financial uncertainty in the United States, as the main origin of global economic fluctuations, which can be said to describe the recent history of the global economy. They also cast doubts on the ability of uncertainty indicators based on the counting of key words in the media as a barometer of traditional economic uncertainty, known to be theoretically associated to negative outcomes in terms of activity and prices. In this sense, uncertainty indicators based on the estimation and aggregation of forecast errors seem more appropriate, hence producing results in line with the understanding of uncertainty as a negative phenomenon on a macro level, especially for investment prospects. |
| Keywords: | macroeconomic uncertainty; financial uncertainty; credit markets; funding; global business cycles |
| JEL: | D80 E44 F21 F44 G15 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:69&r=all |
| By: | Felipe Benguria (Assistant Professor, Department of Economics, University of Kentucky (E-mail: fbe225@uky.edu)); Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, National Graduate Institute for Policy Studies, E-mail: hmatsu.hm@gmail.com)); Felipe Saffie (Assistant Professor, Darden School of Business, University of Virginia (E-mail: SaffieF@darden.virginia.edu)) |
| Abstract: | This paper proposes a framework to jointly study productivity and trade dynamics during financial crises. The persistent output loss caused by crises is driven by lower productivity growth, which is determined by changes in product entry and exit margins in domestic and export markets. We calibrate and validate the model using unique data on firms' product portfolios, finding it closely matches the behavior of various margins during Chile's 1998 sudden stop. We decompose the sources of the welfare cost of sudden stops, finding a third of the welfare cost is due to a decline in productivity growth. Lower productivity growth, in turn, is due mostly to slower firm and product entry into the domestic market, while a decrease in production costs induces surviving firms to tilt their product portfolios towards export markets, boosting the productivity recovery in the aftermath of the crisis. |
| Keywords: | Endogenous growth, Firm dynamics, Trade dynamics, Sudden Stops |
| JEL: | F10 F41 F43 F44 O33 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:20-e-13&r=all |