|
on Open Economy Macroeconomics |
| By: | Sebastián Fanelli (CEMFI, Centro de Estudios Monetarios y Financieros); Ludwig Straub (Harvard University) |
| Abstract: | We study a real small open economy with two key ingredients: (i) partial segmentation of home and foreign bond markets and (ii) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry-trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (a) the optimal policy leans against the wind, stabilizing the exchange rate; (b) it involves smooth spreads but allows exchange rates to jump; (c) it partly relies on “forward guidance”, with non-zero interventions even after the shock has subsided; (d) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates. |
| Keywords: | foreign exchange interventions, limited capital mobility, reserves, coordination. |
| JEL: | F31 F32 F41 F42 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2019&r=all |
| By: | Robert Kollmann |
| Abstract: | This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap. |
| Keywords: | Zero lower bound, expectations-driven and fundamentals-driven liquidity traps, domestic and international shock transmission, terms of trade, exchange rate, net exports |
| JEL: | E3 E4 F2 F3 F4 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-05&r=all |
| By: | Stefan Avdjiev (Bank for International Settlements); Bryan Hardy (Bank for International Settlements); Sebnem Kalemli-Özcan (University of Maryland); Luis Servén (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We construct a new quarterly data set of international capital flows broken down by sector: banks, corporates and sovereigns. Using our novel data set, we establish severalkey facts that demonstrate the importance of distinguishing in- and outflows by the domestic sectoral identity. We find that public sector flows may serve as a countervailing force to private sector flows, especially in emerging markets (EMs), as these flows respond differently not only to country-specific fundamentals but also to global shocks. The high inflow-outflow correlation observed in total capital flow data is driven by within-sector flows, especially those of AE banks. In general, inflows and outflows of AEs and inflows to EMs are primarily AE banks’ transactions, and, as a consequence, respond similarly to capital flow drivers. By contrast, EM outflows respond differently to global shocks and changes in fundamentals, leading to lower inflow-outflows correlations for EMs. |
| Keywords: | Quarterly capital flows, external corporate and bank debt, systemic risk. |
| JEL: | F21 F41 O1 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2020_2020&r=all |
| By: | Cecile Gaubert; Oleg Itskhoki; Maximilian Vogler |
| Abstract: | We use the granular model of international trade developed in Gaubert and Itskhoki (2020) to study the rationale and implications of three types of government interventions typically targeted at large individual firms -- antitrust, trade and industrial policies. We find that in antitrust regulation, governments face an incentive to be overly lenient in accepting mergers of large domestic firms, which acts akin to beggar-thy-neighbor trade policy in sectors with strong comparative advantage. In trade policy, targeting large individual foreign exporters rather than entire sectors is desirable from the point of view of a national government. Doing so minimizes the pass-through of import tariffs into domestic consumer prices, placing a greater portion of the burden on foreign producers. Finally, we show that subsidizing `national champions' is generally suboptimal in closed economies as it leads to an excessive build-up of market power, but it may become unilaterally welfare improving in open economies. We contrast unilaterally optimal policies with the coordinated global optimal policy and emphasize the need for international policy cooperation in these domains. |
| JEL: | D43 F12 F13 L40 L52 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28553&r=all |
| By: | Mariarosaria Comunale; Justas Dainauskas; Povilas Lastauskas |
| Abstract: | International trade flows are volatile, imbalanced, and fragmented across off-shored supply chains. Yet, not much is known about the mechanism through which trade flows adjust in response to shocks over time. This paper derives a dynamic gravity equation from a theory of habits in the supply chains that generates autocorrelated bilateral trade flows that are heterogeneous across different country pairs. We estimate our version of the dynamic gravity equation for 39 countries over the period of 1950-2014 and find that the transmission of local and global trade shocks is fundamentally different. We show that the trade persistence coefficient falls from 0.91 to 0.35 when we depart from the existing empirical gravity models that draw inference from the pooled coefficient estimates without controlling for the variation in the unobservable global factors. Thus, our approach escapes the excess trade persistence puzzle and adds to the explanation of the sharp decline and the rapid recovery of the global trade flows during the “Great Trade Collapse” of 2008-09. In addition to the traditional variables in the gravity equation, we also show that a cross-country habit asymmetry creates bilateral and multilateral trade imbalances, which are an important determinant of bilateral trade flows both theoretically and empirically. |
| Keywords: | Dynamic Gravity Equation, Habits, Trade Persistence, Trade Imbalance, Global Shocks, Parameter Heterogeneity |
| JEL: | C23 F14 F41 F62 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-11&r=all |
| By: | Maggiori, Matteo |
| Abstract: | A review of recent advances in open economy analysis under segmented international financial markets. A set of modeling tools that have been used to understand ?financial crises, the ensuing policy response (e.g., Quantitative Easing and FX intervention), deviations from arbitrage (CIP deviations), and more generally the impact of capital flows on exchange rates. This modeling approach has also sheds a different light on classic topics such as the exchange rate disconnect, international risk sharing, UIP failures, and the carry trade. |
| Date: | 2021–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:z8g6r&r=all |
| By: | Bresser-Pereira, Luiz Carlos; Feijó, Carmem; Araújo, Eliane Cristina de |
| Abstract: | Police regimes are incompatible with economic growth because liberal economists don’t see industrialization as a condition for economic development; because they pressed for trade liberalization, ignoring that the import tariffs were a way of neutralizing the Dutch disease; beause they don’t see that the growth with foreign indebtedness policy as well as the use of the exchange rate as an anchor to control inflation harm growth because the required capital inflows to finance the respective current account deficits appreciate the national currency, and, so, stimulate consumption while discourages investment; because the austerity programs that they defend are rather a way of defending the interests of rentiers and financiers than a sound macroeconomic policy. |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:541&r=all |
| By: | Christina Anderl; Guglielmo Maria Caporale |
| Abstract: | This paper estimates a model of the real exchange rate including standard fundamentals as well as two alternative measures of inflation expectations for five inflation targeting countries (UK, Canada, Australia, New Zealand, Sweden) over the period January 1993-July 2019. Both a benchmark linear ARDL model and a nonlinear ARDL (NARDL) specification are considered. The results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long- and short-run. In particular, the speed of adjustment towards the PPP-implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones. Monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively. The inflation targeting framework might be especially appropriate for this purpose. |
| Keywords: | nonlinearities, asymmetric adjustment, PPP, real exchange rate, inflation expectations |
| JEL: | C32 F31 G15 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8921&r=all |
| By: | Trung Duc Tran |
| Abstract: | This paper studies the macroeconomic effects of commodity price uncertainty (CPU) shocks. Using Australia as a case study, an econometric-based CPU index is proposed to reveal that Australia has experienced an unprecedented increase in uncertainty from the commodity market recently. Evidence from a VAR model shows that CPU shocks have a larger recessionary impact than other relevant uncertainty shocks such as financial, economic and trade policy uncertainty. The empirical results are then interpreted in a non-linear multisector DSGE model of the Australian economy by estimating key parameters in the DSGE model to match its responses to the VAR responses. CPU shocks in the DSGE model, via foreign commodity export demand with price rigidity, trigger a precautionary response and cause a decline in real economic activity. |
| Keywords: | Commodity Price Uncertainty, Small Open Economy, VAR-DSGE |
| JEL: | C32 F41 E32 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-09&r=all |
| By: | Pol Antras (Harvard University and CEPR and NBER); Stephen J Redding (Princeton University and CEPR and NBER); Esteban Rossi Hansberg (Princeton University and CEPR and NBER) |
| Abstract: | We develop a model of human interaction to analyze the relationship between globalization and pandemics.Our framework provides joint microfoundations for the gravity equation for international trade and the Susceptible-Infected-Recovered (SIR) model of disease dynamics. We show that there are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs,and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. If agents do not internalize the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. Once agents internalize the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade. |
| Keywords: | COVID-19 |
| JEL: | F60 I18 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:267&r=all |
| By: | Mathias Hoffmann; Lilia Ruslanova |
| Abstract: | U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight that household access to finance is important to ease adjustment after asymmetric terms-of- trade shocks in monetary unions, in particular when the geographical mobility of labor is limited. |
| Keywords: | banking deregulation, China trade shock, sectoral reallocation, house prices, consumer access to finance |
| JEL: | F16 F41 G18 G21 J20 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-25&r=all |
| By: | Pol Antràs; Davin Chor |
| Abstract: | This paper surveys the recent body of work in economics on the importance of global value chains (GVCs) in shaping international trade flows and multinational activity. On the empirical front, we begin reviewing several variants of the "macro approach" to measuring the relevance of global production sharing in the world economy, and we also offer a critical evaluation of the country- and industry-level datasets (or World Input Output Tables) that have been used to date. We next discuss the advantages and disadvantages of a burgeoning alternative "micro approach" that has instead employed firm-level datasets to document the ways in which firms have sliced up their value chains across countries. On the theoretical front, we propose an analogous dissection of the literature. First, we review a vast body of work developing country- and industry-level quantitative frameworks that are easily calibrated with World Input Output Tables, and that open the door for counterfactual exercises with minimal demands on estimation. Second, we overview micro-level frameworks that have treated firms rather than countries or industries as the relevant unit of analysis, and that have unveiled a number of distinctive mechanisms by which GVCs shape the determinants and consequences of international trade flows in ways distinct from traditional models of international trade. We close this survey with a discussion of a still infant literature on the desirability and effects of trade policy in a world of GVCs. |
| JEL: | F1 F2 F4 F6 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28549&r=all |
| By: | Alexander Beames; Mariano Kulish; Nadine Yamout |
| Abstract: | We set up and estimate a small open economy model with fiscal policy in which trend growth can permanently change. The magnitude and timing of the change in trend growth are estimated alongside the structural and fiscal policy rule parameters. Around 2003:Q3, trend growth in per capita output is estimated to have fallen from just over 2 per cent to 0.6 per cent annually. The slowdown brings about a lasting transition which in the short-run decreases consumption tax revenues but increases them in the long-run changing permanently the composition of tax revenues and temporarily increasing the government debt-to-output ratio. |
| Keywords: | Open economy, trend growth, fiscal policy, real business cycles, estimation, structural breaks |
| JEL: | E30 F43 H30 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2021-18&r=all |
| By: | Esteban Jaimovich (University of Surrey); Boryana Madzharova (University of Erlangen-Nuremberg); Vincenzo Merella (Università degli Studi di Cagliari) |
| Abstract: | This paper explores patterns of quality differentiation and specialization relying on model-level panel data of retail sales and prices of refrigerators across 23 countries in the European Union. Unlike customs data aggregated at the product category, typically used in the literature, model-level data allow us to test for the presence of nonhomotheticities by comparing market shares of identical models across different markets. We measure quality at the model level, account for varying willingness-to- pay for quality at different levels of income, and link quality measures to objective model attributes. Using originally assembled data on the country of manufacture of each model, we study patterns of quality specialization by brands with plants in multiple countries. We find that _rms locate the production of their higher-quality models in richer countries, and argue that such patterns of quality specialization are driven mainly by a home-market effect linked to nonhomothetic preferences. |
| JEL: | F1 F14 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0620&r=all |