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on Open Economy Macroeconomics |
| By: | Jeanne, Olivier (Johns Hopkins University, Department of Economics) |
| Abstract: | This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments---the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps. |
| Keywords: | Tariff, exchange rate, capital control |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:66667&r= |
| By: | Gabriel Rodríguez (Departamnento de Economía, Pontificia Universidad Católica del Perú.); Paul Castillo (Banco Central de Reserva, Pontificia Universidad Católica del Perú.); Harumi Hasegawa (Pontificia Universidad Católica de Chile); Hernán B. Garrafa-Aragón (Escuela de Ingeniería Estadística de la Universidad Nacional de Ingeniería) |
| Abstract: | This paper assess the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier et al. (2017). The main empirical results show, for the pre Inflation Targeting (IT) and IT periods, that the model that clearly outperforms in terms of marginal log density, features a Taylor rule that does not respond to changes in the nominal exchange rate and an active use of FX intervention by the Central Bank. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1; and that FX intervention has become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs shows that FX intervention has contributed to reduce the volatility of GDP in response to productivity and terms of trade shocks in Peru. JEL Classification-JE: C22, C52, F41. |
| Keywords: | Small Open Economy; Taylor Rule; Monetary Policy Rule; Exchange Rate; Bayesian Methodology; Peruvian Economy; FX interventions; New Keynesian DSGE Model. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00504&r= |
| By: | António Afonso; José Carlos Coelho |
| Abstract: | We investigate the bilateral relationship between government budget balances and current account balances for Portugal and Germany. We find that the response of the current account balance to the budget balance is greater in Portugal than in Germany. On the other hand, the response of the budget balance to the current balance is higher in Germany than in Portugal. In Portugal and Germany, a fiscal rules index has a negative impact on the current account balance and the government effectiveness index has a positive impact on the government balance. The public debt as a percentage of GDP positively affects the current account balance in Portugal, and in Germany it does not. During the period of implementation of the external assistance programme in Portugal, the current account balance improved, while the government balance did not. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_72&r= |
| By: | Zsolt Darvas |
| Abstract: | This working paper updates the earlier methodological description of the dataset published as Darvas, Z. (2012) 'Real effective exchange rates for 178 countries- A new database', Working Paper 2012/06, Bruegel Click here for the most recently updated database We demonstrate that short-run real exchange effective rate changes are dominated by nominal effective exchange rate changes, while inflation rates are sticky and contribute little to short-run real exchange rate changes. These... |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:46497&r= |
| By: | Marina Lovchikova; Johannes Matschke |
| Abstract: | Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are volatile, investors require a high marginal compensation to hold risky emerging market debt. Regulators are able to exploit this tight link and raise capital inflow controls, thereby lowering the risk premium and reducing the overall cost of debt. We emphasize that risk premium manipulations via capital controls are only optimal from the perspective of the individual emerging market, but not from a global perspective. This suggests that the use of capital controls may impose costs in an international context. |
| Keywords: | Capital Controls; Risk Aversion; Risk Premium; Volatility |
| JEL: | F36 F38 F41 |
| Date: | 2021–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93103&r= |
| By: | Immaculate Machasio (World Bank); Peter Tillmann (University of Giessen) |
| Abstract: | Remittance inflows are driven by macroeconomic conditions in the home and the host economies, respectively. In this paper, we study the effect of U.S. monetary policy on remittance flows into economies in Latin American and the Caribbean. The role of Fed policy for remittances has not yet been studied. We estimate a series of panel local projections for remittance inflows into eight countries. A surprise change in U.S. monetary conditions has a strong and highly significant negative effect on inflows. Our finding remains robust if we change the sample period or include additional variables. Hence, our paper establishes a remittance-channel through which the Fed affects the business cycle abroad. |
| Keywords: | remittances, migration, business cycle, monetary policy, spillovers |
| JEL: | F24 F41 E52 O11 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202140&r= |
| By: | Mr. Santiago Acosta Ormaechea |
| Abstract: | The public sector, in carrying out its operations, often incurs foreign currency denominated liabilities and, as such, is exposed to exchange rate fluctuations that could affect the value of public debt to GDP ratios over time. This paper shows that converting foreign currency denominated flows and stocks into local currency using the average and the end-of-period exchange rates, respectively, as envisaged in public finance manuals, gives rise to an identifiable stock-flow adjustment term—due to intra-year exchange rate fluctuations—that affects public debt accumulation. Importantly, the inclusion of this often-ignored stock-flow adjustment term is critical to accurately project public debt levels and any related indicator that could in turn inform about the risk of debt distress. Using a novel dataset covering 82 countries during 2008–19, the paper shows that this stock flow adjustment term is sizable in countries experiencing large exchange rate depreciations, namely above the 99th percentile of the full sample, reaching 1.2 percent of GDP. Interestingly, the measurement of policy-related concepts such as interest rate-growth differentials and debt stabilizing primary balances are also affected by intra-year exchange rate fluctuations, and in non-negligible ways. |
| Keywords: | Public debt dynamics;intra-year exchange rate fluctuations;interest rate-growth differential;debt stabilizing primary balance.;WP;year exchange rate fluctuation;debt projection;accumulation equation;end-of-period exchange rates;heightened exchange rate volatility;nominal exchange rate depreciation; debt stabilizing primary balance; Exchange rates; Fiscal stance; Currencies; Asset valuation; Global |
| Date: | 2020–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/261&r= |
| By: | Yulei Luo; Jun Nie; Xiaowen Wang; Eric R. Young |
| Abstract: | We propose a production-cost smoothing model with Knightian uncertainty due to ambiguity aversion to study the joint behavior of production, inventories, and sales. Our model can explain four facts that previous studies find difficult to account for simultaneously: (i) the high volatility of production relative to sales, (ii) the low ratio of inventory-investment volatility to sales volatility, (iii) the positive correlation between sales and inventories, and (iv) the negative correlation between the inventory-to-sales ratio and sales. We find that the stock-out avoidance motive (Kahn 1987) emerges endogenously in our model, reconciling the long debate in the inventory literature over the production- cost smoothing and the stock-out avoidance models. |
| Keywords: | Ambiguity Aversion; Robustness; Knightian Uncertainty; Inventories; Production Cost Smoothing |
| JEL: | D83 E21 F41 G15 |
| Date: | 2021–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93094&r= |
| By: | Simon Gilchrist; Bin Wei; Vivian Z. Yue; Egon Zakrajšek |
| Abstract: | In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by more than 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium, which is a measure of the risk-bearing capacity of US financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds. |
| Keywords: | sovereign bonds; CDS; global financial risk; excess bond premium; global financial cycle |
| JEL: | E43 E44 F33 G12 |
| Date: | 2021–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:93483&r= |
| By: | Li, Xiang |
| Abstract: | By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows. |
| Keywords: | average treatment effect,capital control,global financial cycle,monetary policy autonomy,propensity score matching,trilemma |
| JEL: | E52 F32 F33 F42 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:132021&r= |
| By: | Johannes Matschke |
| Abstract: | Emerging markets are concerned about sudden stops in international capital flows, which may lead to severe recessions associated with vicious spirals of currency depreciations and tightening borrowing constraints. A common prescription is to impose macroprudential policies, including prudential capital controls, to limit international borrowing especially in foreign currency. This paper analyzes the supportive role of macroprudential policies geared toward the domestic financial market, suggesting that emerging markets should resort to a wide mix of policies, even when the domestic financial market is frictionless. A simple formula provides further insights: domestic and international macroprudential policies are imperfect complements rather than substitutes, due to distinctive characteristics of foreign and domestic currency bonds. Furthermore, the relative importance of domestic macroprudential regulation increases in the return of domestic bonds. |
| Keywords: | Macroprudential Policies; Capital Controls; Emerging Markets; Welfare |
| JEL: | F34 F41 E44 D62 |
| Date: | 2021–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93107&r= |