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on Open Economy Macroeconomics |
| By: | Giancarlo Corsetti; Anna Lipínska; Giovanni Lombardo |
| Abstract: | Crises and tail events have asymmetric effects across borders, raising the value of arrangements improving insurance of macroeconomic risk. Using a two-country DSGE model, we provide an analytical and quantitative analysis of the channels through which countries gain from sharing (tail) risk. Riskier countries gain in smoother consumption but lose in relative wealth and average consumption. Safer countries benefit from higher wealth and better average terms of trade. Calibrated using the empirical distribution of moments of GDP-growth across countries, the model suggests significant quantitative effects. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation. |
| Keywords: | international risk sharing, asymmetry, fat tails, welfare |
| JEL: | F15 F41 G15 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:958&r= |
| By: | Ferrari Massimo,; Pagliari Maria Sole, |
| Abstract: | In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy. |
| Keywords: | DSGE model, open-economy macroeconomics, optimal policies, climate modelling. |
| JEL: | F42 E50 E60 F30 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:815&r= |
| By: | Robert Kollmann |
| Abstract: | Does household heterogeneity matter for exchange rate determination? This paper tests Kocherlakota and Pistaferri’s (2007) prominent heterogeneous agent model, in which the real exchange rate perfectly tracks relative domestic/foreign moments of cross-household consumption distributions. The evidence presented here indicates that the real exchange rate is disconnected from relative cross-household consumption moments. |
| Keywords: | Household consumption heterogeneity; International and domestic risk sharing; Real exchange rate. |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/330313&r= |
| By: | Hory Marie Pierre,; Levieuge Grégory,; Onori Daria. |
| Abstract: | In this paper, we demonstrate that the size of the fiscal multiplier depends both on currency mismatch and home bias. Our demonstration is based on a real two-country dynamic stochastic general equilibrium model with incomplete and imperfect international financial markets, external debt and financial frictions. We show that if home bias is high, the terms of trade improve following a fiscal stimulus. This reduces the private real debt burden denominated in foreign currency, decreases the external finance premium born by firms, and stimulates investment. Thus, the larger the proportion of firms' debt denominated in foreign currency is, the higher the fiscal multiplier. In contrast, the terms of trade deteriorate when home bias is low. This increases the real debt burden and the external finance premium. Hence, in this case, the fiscal multiplier decreases as the share of firms' debt denominated in foreign currency increases. |
| Keywords: | Fiscal Multiplier, Terms of Trade, Currency Mismatch, DSGE Model, Financial Frictions. |
| JEL: | E62 F34 F41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:813&r= |
| By: | Andrés Fernández; Daniel Guzman; Ruy E. Lama; Carlos A. Vegh |
| Abstract: | To explain the fact that government spending and tax policy are procyclical in emerging and developing countries, we develop a model for the joint behavior of optimal tax rates and government spending over the business cycle. Our set-up relies on financial frictions, which have been shown to be critical features of emerging markets, captured by various degrees of asset market incompleteness as well as varying levels of debt-elastic interest rate spreads. We first uncover a novel theoretical result within a simple static framework: incomplete markets can account for procyclical government spending but not necessarily procyclical tax policy. Explaining procyclical tax policy also requires that the ratio of private to public consumption comoves positively with the business cycle, which leads to larger fluctuations in the tax base. We then show that the procyclicality of tax policy holds in a more realistic DSGE model calibrated to emerging markets. Finally, we illustrate how larger financial frictions, which amplify the business cycle through more procyclical fiscal policies, have sizeable Lucas-type welfare costs. |
| JEL: | F41 F44 H21 H30 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29149&r= |
| By: | Marcelo Randolfo da Costa Januário (LCA Consultores); Mauro Sayar Ferreira (UFMG) |
| Abstract: | We evaluate the presence of the J-curve and the Marshall-Lerner condition after recognizing that terms of trade respond endogenously to global demand and supply shocks, which we identify from a structural VAR estimated with Bayesian techniques for the Brazilian economy, a small open economy with a strong commodity sector. The J-curve is not observed for total trade, capital goods, or consumption goods, but it is verified for fuel, which Brazil exports and imports. The Marshall-Lerner condition is mostly verified, but the volume exported tends not to behave as expected considering its relation to terms of trade, since global income effect plays a major role for determining the quantum exported. The volume imported reacts as expected based on its relation to terms of trade and domestic GDP, with the last appearing to play the most prominent role. The expansion in the exported volume of capital and consumption goods following an improvement in terms of trade runs against the presence of the Dutch disease, at least in the business cycle frequency. |
| Keywords: | J-curve; Marshall-Lerner condition; terms of trade; global shocks; SVAR |
| JEL: | F14 F41 F62 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:cdp:texdis:td635&r= |
| By: | Clemens Sialm; Qifei Zhu |
| Abstract: | Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on mutual fund currency derivatives and document that around 90% of U.S. international fixed income funds use currency forwards to manage their foreign exchange exposure. Funds' currency forward positions differ substantially based on risk management demands related to portfolio currency exposures, return-enhancement motives such as currency momentum and carry trade, and strategic considerations related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior abnormal returns. |
| JEL: | F21 F31 F34 G11 G12 G13 G15 G23 G32 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29082&r= |
| By: | Merih Uctum (Brooklyn College [CUNY, New York] - CUNY - City University of New York [New York], The Graduate Center - CUNY Graduate Center - CUNY - City University of New York [New York]); Remzi Uctum (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, UPN SEGMI - Université Paris Nanterre - UFR Sciences économiques, gestion, mathématiques, informatique - UPN - Université Paris Nanterre); Chu-Ping C Vijverberg (CSI CUNY - College of Staten Island [CUNY] - CUNY - City University of New York [New York], The Graduate Center - CUNY Graduate Center - CUNY - City University of New York [New York]) |
| Abstract: | In light of several economic and financial crises and institutional changes experienced by the European countries, we examine whether these economies achieved synchronization of their business cycles and fostered synchronization of their growth rates. Controlling for reverse causality, we conduct multiple endogenous break tests and find (i) several endogenous break dates that correspond to idiosyncratic shocks affecting individual countries, major shocks in international arena but not the adoption of the euro, suggesting that the convergence process has been nonlinear for a number of countries and that studies imposing break dates exogenously, such as the launch of euro, may lead to biased conclusions; (ii) while output growth was increasingly synchronized for some countries, integration occurred in an asymmetric way and it didn't change or didn't occur for others despite being in the same common currency area (iii) convergence has been prevalent among the non-Eurozone economies in our sample. |
| Keywords: | Convergence,growth synchronization,euro,crises,structural breaks |
| Date: | 2019–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03319011&r= |
| By: | Afees A. Salisu (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Taofeek O. Ayinde (Department of Economics, Fountain University, Osogbo, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA) |
| Abstract: | In this study, we offer a global perspective to the macroeconomic impacts of the COVID-19 pandemic using the multi-country Threshold-Augmented Global Vector Autoregressive Model of Chudik et al. (2020) with focus on real equity prices and real exchange rates. We document, with the generalized impulse responses that the impact of the pandemic on real equity prices is generally negative across the country groupings and the highest negative impact recorded in 2020Q2. The biggest losers among the advanced countries are the advanced Asia Pacific stock markets, while the overall losers are the emerging countries which are compensated with domestic currency appreciation. Our results appear to support the relative policy effectiveness in the emerging economies where the counterfactual analysis shows that the equity markets exhibit reversal to pre-pandemic equilibrium. |
| Keywords: | Threshold-GVAR, financial markets, COVID-19 |
| JEL: | C33 G15 I18 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202154&r= |