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on Open Economy Macroeconomics |
| By: | Kazuko Kano (School of Commerce, Waseda University); Takashi Kano (Graduate School of Economics, Hitotsubashi University and CIRJE, Faculty of Economics, The University of Tokyo) |
| Abstract: | The main tenet of the New Keynesian (NK) paradigm is that price dispersion caused by nominal price stickiness is the primary source of allocative inefficiency. This study empirically evaluates the welfare implications of NK models by observing how internal and external price dispersion responds to two types of large aggregate shocks: high inflation and sharp currency depreciation. For this purpose, we consider the history of US military deployment on a small southern island in Japan called Okinawa following the Pacific War. We investigate unique data variations in micro-level retail prices surveyed in Okinawa and mainland Japan before and after the Okinawan reversion to Japanese sovereignty in May of 1972. By considering the Okinawan experience of three currency regimes during the high inflation period of the early 1970s as valid quasi-natural experiments, we identify statistically significant deteriorations of currency misalignment associated with the sudden exogenous large USD depreciation versus the JPY following the Nixon Shock. Furthermore, we observe that these massive aggregate shocks left the average absolute size of price changes mostly unchanged, but significantly increased the average frequency of price changes in Okinawa. Because a calibrated small open-economy menu cost model fits these empirical findings better than the Calvo model, the welfare costs of exchange rate fluctuations may be more elusive than suggested by the open-economy NK literature. |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2021cf1179&r= |
| By: | Sara B. Holland; Sergei Sarkissian; Michael Schill; Francis E. Warnock |
| Abstract: | Nonlinearities arise in international investment because of a pecking order in barriers. Some severe barriers render all others meaningless, and only when they are alleviated do other barriers become important. We show, using quantile regressions designed to model relations at more points than just the conditional mean, how various investment theories hold at different points in the distribution of bilateral cross-border equity holdings. Our results reconcile a number of findings in the literature by highlighting that datasets that focus on different points of the barriers (investment) distribution can naturally lead to different results. |
| JEL: | F15 F21 F3 G15 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29432&r= |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL) |
| Abstract: | This paper estimates a 3-country DSGE model to identify the drivers of exchange rate volatility in small open economies (SOE). In addition to the usual cross-country linkages through trade and asset holdings, the model features common shocks that a¤ect economies symmetrically. Using data from Jamaica, the US and the G-7 region (excluding the US), the paper finds that external financial shocks are the primary drivers of exchange rate fluctuations in the SOE. While domestic financial shocks are bigger contributors than US and G-7 specific shocks, shocks that are common across the US and the G-7 generally play the main role. Nonfinancial shocks, domestic and external, are inconsequential for exchange rate volatility. Inferences from a vector autoregressive model with exogenous variables are consistent with these results. |
| Keywords: | Jamaica, exchange rates, DSGE, small open economy, G-7, Bayesian estimation. |
| JEL: | E32 E44 F33 F44 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2021-02ua&r= |
| By: | Brand, Claus; Goy, Gavin; Lemke, Wolfgang |
| Abstract: | We build a novel macro-finance model that combines a semi-structural macroeconomic module with arbitrage-free yield-curve dynamics. We estimate it for the United States and the euro area using a Bayesian approach and jointly infer the real equilibrium interest rate (r*), trend inflation (π*), and term premia. Similar to Bauer and Rudebusch (2020, AER), π* and r* constitute a time-varying trend for the nominal short-term rate in our model, rendering estimated term premia more stable than standard yield curve models operating with time-invariant means. In line with the literature, our r* estimates display a distinct decline over the last four decades. JEL Classification: C11, C32, E43, G12, E44, E52 |
| Keywords: | arbitrage-free Nelson-Siegel term structure model, Bayesian estimation, equilibrium real rate, natural rate of interest, r*, term premia, unobserved components |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212612&r= |
| By: | Edouard Mien (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA [2017-2020] - Université Clermont Auvergne [2017-2020]) |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03414283&r= |
| By: | Ms. Marialuz Moreno Badia; Yuan Xiang; Juliana Gamboa-Arbelaez |
| Abstract: | In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis. But in the face of persistent primary deficits, debt service tends to rise abruptly—particularly in emerging markets—and a fiscal crisis ensues. There is also evidence that a large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities. These findings underscore that, though not necessarily a red-herring, low interest-growth differentials cannot fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts. |
| Keywords: | dampening debt; interest-growth differential; debt build-up; debt-stabilizing role; debt Decomposition; Debt sustainability analysis; Real interest rates; Contingent liabilities; Global |
| Date: | 2021–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/229&r= |
| By: | Lee A. Craig; Julianne Treme; Thomas J. Weiss |
| Abstract: | We constructed a time series of menu prices for the identifiable restaurants at which James Bond dined in France and the UK that yields one of the few international price series representing luxury services. This series enabled us to calculate a real exchange rate based on prices pertinent to international travelers. We also compiled a time series on the salary of workers in the British Civil Service at Grade 7, like Bond, from 1953 to 2019. Our results indicate that French restaurant prices increased faster than Grade 7 salaries over the entire period and changes in the British exchange rate were not favorable for British travelers. To dine weekly in France, during the 1950s and 1960s, Bond would have spent 18 percent of his salary; whereas over the course of the Euro era the same basket of luxury services would have required on average 26 percent of his salary. Finally, our data indicate a likely violation of the law of one price during both the Pound-Franc and Pound-Euro eras. |
| JEL: | D4 E3 F2 N10 N14 Z3 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29415&r= |
| By: | Han, Minsoo (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); An, Sungbae (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Hyosang (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Kim, Subin (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)); Lee, Jinhee (KOREA INSTITUTE FOR INTERNATIONAL ECONOMIC POLICY (KIEP)) |
| Abstract: | To make a meaningful response logic to future exchange rate pressures, we monitor the determinants of the current account and exchange rate. First, according to the analysis of current account determinants, the current account imbalance will gradually ease from a long-term and structural perspective if the domestic financial market develops or access to the international financial market is strengthened. In addition, existing structural current account estimates that do not take into account international financial market conditions may have underestimated the structural current account balance of emerging countries such as Korea. Second, based on the analysis of the currency determinants, we can argue that the weak won is structurally inevitable due to the weak yuan. |
| Keywords: | current account; exchange rate; financial market; Korea |
| Date: | 2021–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kiepwe:2021_017&r= |
| By: | Juan Yepez |
| Abstract: | Dutch disease is often referred as a situation in which large and sustained foreign currency inflows lead to a contraction of the tradable sector by giving rise to a real appreciation of the home currency. This paper documents that this syndrome has been witnessed by many emerging markets and developing economies (EMDEs) as a result of surges in capital inflows driven by accommodative U. S. monetary policy. In a sample of 25 EMDEs from 2000-17, U. S. monetary policy shocks coincided with episodes of currency appreciation and a contraction in tradable output in these economies. The paper also shows empirically that the use of capital flow measures (CFMs) has been a common policy response in several EMDEs to U.S. monetary policy shocks. Against this background, the paper presents a two sector small open economy augmented with a learning-by-doing (LBD) mechanism in the tradable sector to rationalize these empirical findings. A welfare analysis provides a rationale for the use of CFMs as a second-best policy when agents do not internalize the LBD externality of costly resource misallocation as a result of greater capital inflows. However, the adequate calibration of CFMs and the quantification of the LBD externality represent important implementation challenges. |
| Keywords: | monetary policy shock; LBD externality; Dutch disease effect; emerging markets and developing economies; EMDEs monetary policy framework; Dutch disease; Capital inflows; Exchange rates; Exchange rate arrangements; Global |
| Date: | 2021–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/209&r= |
| By: | Hadrien Camatte; Guillaume Daudin (DIAL - Développement, institutions et analyses de long terme, OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique); Violaine Faubert; Antoine Lalliard; Christine Rifflart (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po) |
| Abstract: | We analyse the elasticity of the household consumption expenditure (HCE) deflator to the exchange rate, using world input-output tables (WIOT) from 1995 to 2019. In line with the existing literature, we find a modest output-weighted elasticity of around 0.1. This elasticity is stable over time but heterogeneous across countries, ranging from 0.05 to 0.22. Such heterogeneity mainly reflects differences in foreign product content of consumption and intermediate products. Direct effects through imported consumption and intermediate products entering domestic production explain most of the transmission of an exchange rate appreciation to domestic prices. By contrast, indirect effects linked to participation in global value chains play a limited role. Our results are robust to using four different WIOT datasets. As WIOT are data-demanding and available with a lag of several years, we extrapolate a reliable estimate of the HCE deflator elasticity from 2015 onwards using trade data and GDP statistics. |
| Keywords: | Global value chains,Spillovers,Input-output linkages,Cost-push inflation |
| Date: | 2021–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03411197&r= |
| By: | Richard Baldwin; Rebecca Freeman |
| Abstract: | Recent supply disruptions catapulted the issue of risk in global supply chains (GSCs) to the top of policy agendas and created the impression that shortages would have been less severe if GSCs were either shorter and more domestic, or more diversified. But is this right? We start our answer by reviewing studies that look at risks to and from GSCs, and how GSCs have recovered from past shocks. We then look at whether GSCs are too risky—starting with business research on how firms approach the cost-resiliency trade-off. We propose the risk-versus-reward framework from portfolio theory as a good way to evaluate whether anti-risk policy is justified. We then discuss how exposures to foreign shocks are measured and argue that exposure is higher than direct indicators imply. Finally, we consider the future of GSCs in the light of current policy proposals and advancing technology before pointing to the rich menu of topics for future research on the risk-GSC nexus. |
| JEL: | F10 F13 F14 F15 F23 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29444&r= |
| By: | Agostina Brinatti; Alberto Cavallo; Javier Cravino; Andres Drenik |
| Abstract: | We use data from a large web-based job platform to study how the price of remote work is determined in a globalized labor market. In the platform, workers from around the world compete for jobs that can be done remotely. We document that, despite the global nature of the marketplace, the location of the worker accounts for over a third of the variance in wages. The observed wage differences are strongly correlated to the GDP per-capita of the worker’s country. This correlation is not accounted for by differences in workers’ characteristics, occupations, nor for differences in the employers’ locations. We also document that remote wages in local currency move almost one-for-one with the dollar exchange rate of the worker’s country, and are highly sensitive to changes in the wages of foreign competitors. Finally, we provide a new measure on which jobs are easier to offshore that is based on the prevalence of cross-border contracts rather than on subjective job characteristics, and show that there is substantial heterogeneity in the offshorability of remote occupations. |
| JEL: | F1 F2 F4 F6 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29437&r= |